Tuesday, July 29, 2008

Drill, Drill, Drill Strikes Again: Oil Drops $3

Isn’t it funny that news reports this morning showing that Sen. Harry Reid will in fact allow a drill, drill, drill amendment to come to the Senate floor seem to have triggered a $3 drop in oil to less than $122 a barrel. Is this a coincidence? I don’t think so. More like cause-and-effect.

Oil traders aren’t stupid. There are a dozen Democrats in the Senate who will vote for drilling, and that means future energy supplies will rise. Coupled with falling oil demand, especially by motorists, that means lower prices. Even unleaded gas futures are now dropping to less than $3 a gallon. Add in a buck for local and state taxes on average, and pump prices will drop to under $4 a gallon.

So I guess those horrible oil speculators are not so horrible anymore. Since President Bush launched his drilling-moratorium offensive oil prices are down almost $30.

Even in the House, where Nancy Pelosi wants to save the planet, political pressures are building for a series of votes to expand drilling. Republicans are now linking Obama to Pelosi and Reid as the cause of high oil prices and the economic downturn. This is good politics and good economics.

It also reminds me that government matters a lot in fostering economic expectations. Take the gigantic housing bailout bill. Supposedly this was going to help banks recover from sinking sub-prime mortgage paper based on defaults and foreclosures. But as the bailout bill passed the House and the Senate going back to last Thursday, banks and other financial stocks have been clobbered. Know why? Lenders may be forced to take the very worst mortgage paper as part of the “loan modification” program. That means the banks will have to write down a lot more loans and loan principal.

I guess the moral of the story for the growing bailout crowd in Washington is be careful what you wish for. Or, remember the unintended consequences of hyperactive government.