Thursday, July 17, 2008

How to lower the price of oil

Here's an interesting piece by Harvard's Martin Feldstein, who was Council of Economic Advisers head during the Reagan administration and is a pretty good economist. He argues that because the expected future price of oil causes those with supplies to keep it in the ground rather than sell it -- because they expect the price to be even higher in the future -- anything done now to reduce the expected future price of oil will have an immediate impact on the current price of oil. He notes that steps to reduce demand -- higher CAFE standards, for example --would help, as would steps expected to increase supply, even if the expected new supply wouldn't actually come online for a while. Thus, I infer (he doesn't say it directly) that just announcing that we're going to start drilling offshore or in ANWR should have a downward impact on the price of oil now.

I find the argument quite persuasive. The same argument applies to food. Announcing that the ethanol program would be ended or suspended for a few years should place immediate downward pressure on the price of corn. It might well end up higher than a year or so ago -- increased demand due to increased affluence in China, India and the Gulf states would still be a factor, as would the drought in Australia that to my knowledge hasn't ended yet -- but it still should go down noticeably. The greatest impact would be on those on the edge of dire poverty in underdeveloped countries.

1 comment:

Anonymous said...

Bush cancelled the executive order earlier this week. We got the biggest one day drop in the price of oil since 1991, and 2 more consecutive days of price drops (so far). I would say that is at least strong evidence to support this theory. If congress will get out of the way, we may see a large drop.