Claims Dept: AFP on Dole, gas prices

Joseph,

Consumers do not set the price of oil. If they did, we wouldn't be having this discussion about the effects of $4/gallon gas.

Major changes in consumer behavior can affect the price of oil, by influencing the decisions of those who do set the price. Consumers have been controlling their demand, in response to the higher prices themselves. This could well be a part of gas prices receding from their recent highs. (That's supply & demand 101, a principle which I understand the JLF to enshrine.)

However, this discussion goes back to your assertion that Bush's lifting of the executive branch's moratorium on expanded drill leasing was a cause of that drop.

In response, I've pointed out that those who control oil pricing understand what an empty gesture the Bush action was, including how long it would take for new leases to be bid upon, issued, explored, and begin production; as well as how little those new leases would produce relative to the size of the world oil market. So Bush's action is highly unlikely to significantly influence their current pricing behavior.

IF Bush's action had any influence on end-consumer behavior, by persuading the ignorant that it would produce a major (or any short-term) boost in supply, then that would have INCREASED demand at a time when supply was not, in fact, being increased by the action. There's no evidence of which I'm aware that such happened, but if it did, it would have created an UPWARD pressure on pricing, not a drop.

There's no contradiction in those points. And it comes back to the conclusion that there is no rational mechanism through which Bush's purely symbolic move caused a current drop in gas prices.

If Dan sees this, Joe, I'm sure he'll let you know what's on his mind. Until then, I'll give you my answer to:

"Who demands gas and oil if not consumers?"

This actually goes to the crux of what I blogged about a few weeks ago. The Saudi oil minister made a comment recently that there were contracts pending that equalled something like fifteen times the daily 86 mbpd actual usage of crude oil. Most of these paper contracts are held by non-end-user traders who are banking on future demand to stay in line with projections. When current (real time) usage drops below what was projected, it raises some doubts about what future demand might be in relation to the relatively static daily production. Which pulls the price down some.

So yes, in a thrice-removed fashion, consumer behavior can have an impact on the value of oil futures. But we're not talking about the kind of market impact you'd see from a Tylenol scare or what we've recently seen with spinach and tomatoes. People can't just "quit" using gasoline en masse. With $4.00 a gallon gas, people have tightened up some, and are being more efficient in their driving habits. And some of them are (finally) trading down to more efficient vehicles. If this trend continues (and I hope it does), future demand projections will have to be altered.

But here's the reality: consumers didn't cause the per barrel price of crude to quintuple, traders did. It took an Act of Congress to make this mess, and it's going to take an Act of Congress to fix it. I know you market guys don't like to hear that, but American citizens are suffering, American businesses are leaking into the red, and millions of third-worlders have seen their food security ripped away by this.

Dan,

On August 9 you wrote: "On the other hand, economists analyzing the recent fall in gas prices (as well as in the commodities markets) DO say that these trends appear to be linked to real market demand drops related to the soaring prices in the first place, as well as continuing weakness in the economy."

On August 14 you wrote: "The simplest, most reasonable solution to falling gas prices over the last few weeks is the known falling demand in response to the higher prices."

But in your latest missive on August 15, you wrote, "Consumers do not set the price of oil..."

Who demands gas and oil if not consumers?

Joseph, I give the oil companies whose decisions directly determine the week to week price of gas credit for making their pricing decisions on a rational basis. Their analysts understand that lifting the moratorium on new Atlantic drilling leases will not have any--read, zero--near-term effect on their costs, or on the near-term supply of oil. Therefore, it has no independent connection to their rational pricing decisions now.

Your reference to consumers making decisions on the basis of their expectations is true, so far as it goes. That is, consumers may pay more for housing when they expect the value of the housing to rise; and they certainly have shunned SUVs in favor of more efficient vehicles as the price of gas has soared.

However, that widely misses the point in this discussion. Consumers do not set the price of oil, and they are unlikely to change their own gas-buying behavior today in response to a misinformed belief that Bush's action will have some future influence on gas prices. If any were so foolish as to buy that passed-over guzzler in response to Bush's moratorium lifting, then that would raise demand at a time when supply is not being affected--producing an UPWARD pressure on prices, not downward.

Of course, there's no evidence that's happening in any case, so this latest defense of your original argument merely drives the chuckle-meter even higher.

Miss a day, miss a lot. I included the link to my original post in the LockerRoom thinking Dan and others might follow it to read a bit more of my thoughts, which included an acknowledgment that gas and oil prices have fallen for a number of reasons - these include lower current demand, a recently strengthening dollar, expectations of a slowing global economy, concerns that China's demand for oil might fall after the Olympics, and expectations of increased future supply (in the U.S. resulting from opening more areas to drilling) easing constraints on current supply.

Dan Besse's original claim was that "changing the policy on future offshore drilling leasing will have any notable affect on near-term gas prices" would not pass "the laugh test for any rational observer."

Such a rational observer would seem to discount entirely the role of future expectations. People bought houses in part due to expectation of future price increases. People bought smaller cars in part due to expectations that gas prices would remain high. As their behavior changed, both current and future demand looked likely to fall. With different technologies to extract oil and new areas opening to exploration, supply looked likely to expand. The combination of historical actions, current events, and future expectations play into every decision we make.

Did you read my entire post, Ryan?

I pointed out how more drilling here wouldn't substantially affect prices at the pump, meaning those two having a conversation about gas prices get nothing out of the deal, which addresses your "presented fairly" question.

I mentioned the increased CAFE standards, making the "Congress hasn't lifted a finger" part inaccurate.

If I threw in some extra stuff about the environment or living with the legacy of an unnecessary war, well. Just consider that stuff a "bonus", and free of charge. :)

I'd like to repeat again that the point of the fact-check was not to determine whether or not increased oil exploration is a good thing or will drive down prices, etc., but to determine whether the facts cited in the ad are accurate and presented fairly.

— RTB 

Okay, John. I will admit that the likelihood of increased oil exploration and the tapping of heretofore untapped sources would have an impact (how much, neither of us knows) on the way future supplies are estimated. Of course, the folks that are actually engaged in the trading of oil futures are aware of the realities of this (potential) future supply increase, which means they're not likely to believe future supplies will be (substantially) increased from these sources. Making it even less likely Bush's rescinding of the Executive ban (which is pointless without a matching Congressional move) on OCS and ANWR exploration would have the market impact Joseph suggests it did.

Okay, so let's talk about the ad for a minute, and the assertion that Dole's "more exploration" posture is going to lower gas prices for consumers. You know as well as I (and many reading this) that the only reason the oil companies haven't stepped up the exploration and drilling of domestic oil from their (current) vast leased sites is because it hasn't been economical to do so. The only reason it's become economical now is because of the current high prices. As long as the price stays high, constructing new (or renovating old) platforms, and using them to extract oil from small and scattered sources might continue to be profitable. If (for whatever reason) oil prices do drop substantially, as this ad predicts, then all this domestic drilling will no longer be economical, and will probably be suspended in favor of cheaper (foreign) oil.

By now you should have figured out what I'm driving at: if the price of gas at the pump does drop substantially for Liddy's constituents, it won't be because of all this expensive exploration, and a lot of that expensive exploration will cease when (or if) the price drops. If the price doesn't drop, then domestic drilling might chug along, but that couple is still standing at the pump complaining about gas prices.

Ergo, whether the price drops or stays high, the ad is misleading.

Now let's talk about what Senator Dole has done to drive up the price of gas at the pump. And this one's so damned simple even FFC should catch on: the price of oil began to rise substantially in 2003, going from something like $27 per barrel up to $45, $60, $80, and upupup. What has been a constant factor and news item since 2003? I just saw several light bulbs pop on, and I hope they're CFLs.

And by the way, Congress has lifted a finger, even though (many) Republicans fought hard to stop it. Regardless of how this will impact an automotive industry that should have brought this about on their own, the new CAFE standard (35 mpg) will not only reduce out-of-pocket gas expenses for consumers, it will knock about 2.4 mbpd off the U.S.'s daily consumption, which also cuts the amount of c02 and other crap we're emitting.

Dan, what is "Lockespeak"? Did you intend to compare JLF to Orwell's villains, or is there some more obscure reference you were trying to make?

Talk about Occam's Razor.

scharrison, you are absolutely right that there are many factors at play in market pricing at all times. It is very difficult to attribute any particular change to any particular factor in real time. If you'll grant that the prospect of additional supply coming online could have played some role, even a small one — given the political drift on the issue, politicians of all stripes seem poised to green-light exploration — I'll certainly grant that other factors are in play, and may well be more important in explaining the recent trend.

Remember that the original point of the post was assessing the claim in the AFP ad that ending government restrictions on drilling would have an immediate effect on price. Comments here ridiculed the point, but it is based on sound resource economics. One can debate the magnitude of the effect of prospective supply on current production and price, but the effect is itself logical and predictable.

"If you think that production restrictions are going to fall, increasing production in the future and reducing the asking price of your extractions in the future, that may indeed affect how rapidly you extract and produce today, and in turn today's price."

Also, if you think the Enron loophole is about to be closed (as it should be), and the total number of active traders is going to be reduced by about a third, that paper you're holding is all of a sudden less valuable than it was.

Also, if you think the idea of Peak Oil is finally being embraced by the vast majority of business leaders and policy makers, meaning that substantial efforts to curb crude oil usage are just around the bend, the future demand of 100+ mbpd you're banking on may never happen. Making the paper you're holding less valuable, etc., etc.

There's a lotta "ifs", John. For some reason, you guys have developed a sphere of influence that can (and does) have an impact on public policy decisions. With that influence comes responsibility, and you need to examine the ramifications of what you decide to promote.

Name-calling? I don't see any such. I admit to making light of Mr. Coletti's reasoning, not of him personally.

As to his basic proposition that Bush's announcement on offshore drilling is a prime mover on current pricing for gas, that comes closer to your mark of a "preposterous" conclusion.

Apply Occam's Razor to this situation. In the absence of evidence to the contrary, the simplest solution can be assumed as the most likely. The simplest, most reasonable solution to falling gas prices over the last few weeks is the known falling demand in response to the higher prices.

Suggesting that Bush's order on drilling was instead the causative factor (which he did, then tried to back away from) is without evidentiary support. It serves only a political agenda--which is exactly my criticism.

Boo!

Hope I didn't startle you.

Oh my! The Man Behind The Man Behind The Curtain shows himself, insulting non-believers in a display of arrogance befitting the Puppetmaster himself.

Of course future delusions about supply affect current prices. No one is arguing that point. But to suggest that those delusions are a major force driving current market dynamics - the result of prescience on the part of the most inept administration in the history of the republic - is absurd on its face. The great unwashed have not the slightest inkling of what the Decider is ordering or not ordering ... but they know full well that they can't afford to continue their gluttonous ways. It's the old free-market in full swing. You should take credit for being right - for once.

This entire thread is rather odd, given the fact that there are, indeed, many resource economists who argue that decisions to pump today are influenced in part by expected prices (and supply) tomorrow, next year, and years in the future. Harvard's Martin Feldstein explained the dynamic recently in a WSJ op-ed:

http://online.wsj.com/public/article_print/SB121486800837317581.html

There is plenty of room for debate about how large an effect it might be, or whether it is a significant explanation for the drop in spot prices since the Bush announcement, but the notion that current prices are influenced only by current supplies is preposterous. If you own a certain stock of a resource, the rate at which you extract and sell it depends on a number of factors, including your expectation about how future additions to supply will affect future prices. If you think that production restrictions are going to fall, increasing production in the future and reducing the asking price of your extractions in the future, that may indeed affect how rapidly you extract and produce today, and in turn today's price.

By all means, consult economists. Try reading more widely, and spare everyone the name-calling.

Please, Joseph, spare us the innuendo.

"Dan Besse likes speculators"? How does one take that message from a suggestion that reduced demand is a more likely cause of the recent drop in oil prices? All this time I've thought that your John Locke crew liked (in fact, positively idolatrized) market forces.

Finally, please don't insult everyone's intelligence by claiming that you didn't intend to credit Bush's meaningless executive order on drilling for that price drop. I quote from your own post: "Since July 14, when President Bush repealed the executive order against drilling, oil prices have fallen $30 per barrel and gas prices are down nearly 5% nationwide, and $0.53 at the Hess on Capital Blvd (roughly 13%). That's between 2x and 4x bigger change from an announced change, without Congressional support, than from the tire-gauge plan."

Everyone who can read can draw their own conclusions on that one.

I did not state a belief whether it was Bush's step to allow drilling itself, worries about consumer demand, or consensus that oil prices were just too high - but prices were still at their peak when he rescinded the drilling ban. Whatever the speculation, it is just speculation. The only thing we know for sure is that sellers have been willing to accept lower prices for oil and gasoline. An ABC News story from August 5 stated the price decline stems from a "growing belief that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products." That sounds like speculators have also been pushing prices down.

Joseph,

You're putting forth the classic logical fallacy of post hoc, ergo proper hoc--it happened afterwards, therefore it must be a result. You have no evidence that this short-term fluctuation was related to Bush's action. And more importantly, you have no evidence that it would be a lasting effect in any event. On the other hand, economists analyzing the recent fall in gas prices (as well as in the commodities markets) DO say that these trends appear to be linked to real market demand drops related to the soaring prices in the first place, as well as continuing weakness in the economy. I suggest finally that this continuing weakness in our economy can be directly traced to the many irresponsibilities of Bush Administration policies. So perhaps in a way, Bush is responsible for that dip in prices, albeit not in the way you suggest.

Dan,
Fuel efficiency can improve 3% (roughly $0.12 per gallon) with proper tire inflation for everyone all the time. Since July 14, when President Bush repealed the executive order against drilling, oil prices have fallen $30 per barrel and gas prices are down nearly 5% nationwide, and $0.53 at the Hess on Capital Blvd (roughly 13%).

That's between 2x and 4x bigger change from an announced change, without Congressional support, than from the tire-gauge plan.

See my post
http://www.johnlocke.org/lockerroom/lockerroom.html?id=16784

RTB, my criticism on the merits of this claim is directed at AFP, not at Dome. Specifically, it is directed at AFP's assertion (and the GOP party line) that changing the policy on future offshore drilling leasing will have any notable affect on near-term gas prices. I don't think that passes the laugh test for any rational observer. However, it does fall within the usual range of foolishness for today's GOP policy lines. Therefore, I recognize that it is difficult for an Objective Journalist to label it blatant tomfoolery without being accused of partisanship.

I also acknowledge with regret that in the 3 1/2 hours since I checked the online news, the Edwards affair feeding frenzy has crowded out discussion of trivialities like gas prices and energy policy. So, my apologies to all for distracting attention from the truly important issue of the day...

The purpose of a fact-check is to see that sides are playing fair. My job is not to determine whether a specific policy is a good or bad idea, but rather to see if the facts being used to advance those arguments are true.

— RTB

Dome is being extremely kind to AFP in suggesting that this ad is "generally accurate". Does a scheme to "affect current market prices" by expanding the theoretical supply one to two decades in the future constitute a "real plan to lower gas prices"? Only if you subscribe to AFP's brand of magical thinking. (That's the reasoning, to use a term very loosely, that if you wish really hard for an unlikely result it will come to pass.) We've seen two terms of magical thinking on the budget, economy, and foreign policy under GWB. Saints preserve us from another four years of this snake oil.

It's not clear: You're calling me a free market dude?

Also, I think you mean "eke," although with the state of the newspaper industry these days "Eek!" might be more appropriate...

— RTB 

Just because "supporters say" something, doesn't means that it should be fit for print in a newspaper. Your goal as a journalist, remember, is to leave your readers more informed.

You're kidding, right? This is your free-market dude. The goal is to eek out bigger margins and make more money. That is the only goal. Period.

Huh? How does this make sense: "supporters say that by expanding the potential supply they could affect current market prices, which are based in part on future supply."

Please run that by one of the numerous economists we have here in the region. Just because "supporters say" something, doesn't means that it should be fit for print in a newspaper. Your goal as a journalist, remember, is to leave your readers more informed.

As a former student of many of the economists in the Durham region, I can tell you that current prices are only affected by future supplies...if current levels of supply or demand change as a result of some anticipation of future supply. In this case, in order to bring the current price down, there would have to be an increase in current supplies. As we are currently operating at capacity, there will be no increase in current supplies, and therefore no decrease in prices.

But don't take my word. Please talk to economists...inform your readers!

President Bush lifted the Executive moratorium on domestic and offshore drilling and the per barrel price of oil went down around $12 in two days.

President Clinton vetoed the ANWR drilling bill in 1995. We would have been getting oil for the last three to five years from it by conservative estimates.

Experts say we can get oil production in two to six years and create thousands of jobs in the process. Apparently David Price-D, Brad Miller-D, and Nancy Pelosi-D have something against this. On the state level I know Perdue-D is against it also. Which mainstream media organization has the guts to step up and take a survey of all statewide and legislative candidates on this current issue? Ryan do you?

Paul Terrell III
http://terrellforhouse33@blogspot.com
http:wakegop.org/paul-terrell.htm
terrellforhouse33@live.com