Lost in the frenzy of recent events (The Underwear Bomber, the ObamaCare vote, The White House Party Crashers, Harry Reid’s Slip of the Racist Tongue, etc.) is the fact that crude oil pricing has been steadily increasing of late and is now in the mid-$80’s, and is likely headed to triple-digits soon. Gasoline prices now stand over a dollar higher than last year at this time (currently around $2.80/gal) and appear ready to break the psychologically-important $3.00/gallon barrier very soon.

There is no coverage of this in the news. There is no media attention whatsoever. But when gas gets too high, the Liberal Elite Media (LEM) will once again—predictably—be fanning the flames of the “Big Oil is ripping us off” storyline.

This is totally and intentionally misleading. Crude oil pricing (and therefore U.S. retail gasoline pricing) can be influenced to a very large extent by Presidential/Congressional actions. Traditionally, summer gasoline pricing maxes out about $.80 /gal higher than winter lows, so summer 2010 pricing looks headed into the $3.60/gal range.

It’s not “Big Oil’s” fault. It’s largely the fault of President Obama and his Democratic majorities in Congress.

We have a lot of potential oil supply right here, off the coastlines, in the Gulf of Mexico, in ANWR, and in the Western states’ oil shale deposits. Oil reserves that if developed would lead to dramatically lower crude oil pricing and greatly stabilize the world energy market.

But President Obama and the Democratic Congress have rescinded the off-shore oil exploration leases and refuse to allow exploration in the oil-rich ANWR region of Alaska—in spite of the fact that environmentally safe technology exists for such exploration and extraction. Our oil-drilling technology is far cleaner than that of say, OPEC member Nigeria, but we willingly outsource ‘dirty’ oil production to them and deny the world’s oil market our ‘clean’ oil exploration and extraction technology. It’s politically disingenuous, done solely to curry favor with the environmentally-sympathetic (but technologically unaware) segment of the electorate.

As far as drilling off the coastlines, in ANWR, developing our oil shale resources, etc. are concerned, it’s important to understand how the world’s financial/commodity markets operate.

The world commodity trading markets operate on two main levels: the actual supply and demand of the commodity being traded, and the so-called ‘market psychology’ or confidence that the traders have in that market. The confidence (or lack thereof) in any given market is based largely on the traders’ collective expectations regarding future events. US gasoline pricing is determined by four main factors:

1) World crude oil supply and demand

2) Restrictions on U.S. oil exploration (controlled mainly by U.S. environmental concerns)

3) Distribution/refining inefficiencies (controlled mainly by U.S. environmental concerns—a long article onto itself, dealing with why there have been no new refineries built here in 30 years and the resulting over-demand on our refineries’ too-limited capacity, “boutique” gasoline varieties only being allowed to be sold in certain markets, etc.)

4) Geo/political influences, AKA the ‘terror premium.’

It’s the expectations of the commodity trader that we’re concerned with now. If there is geo-political instability in a critical oil-producing region, then the confidence of the commodities market—based on their expectation regarding possible future events—affects the trading (and therefore the pricing) of that commodity. We all have heard the talk that if, for example, Israel looks to be close to attacking Iran, then the price of oil will soar worldwide. That’s because of the expectations of the commodity traders. You’ve heard a lot about speculators in the oil market driving up crude oil pricing, that it’s not so much a world-wide supply and demand issue as much as it is a speculators’ issue. There is a lot of truth to this, because it’s the commodities traders’ degree of confidence in a given market (along with the actual supply and demand in that market) that determines the pricing.

This is a pretty simplified explanation, but the fundamentals are absolutely true.

Barack Obama is fond of saying that our drilling for oil won’t produce enough appreciable oil in the short term to affect the world’s supply in a way that would bring down prices quickly. That may be true.

But he ignores the reality of the effect that enhanced US domestic oil drilling and development will have on the world’s oil market’s psychology and confidence. Does he ignore this because of his ignorance of basic economics or because of a willful intent to be deceitful? Is he really that unaware of the intricacies of the commodities market or is he intentionally misleading the inattentive, casual electorate for the purpose of political expediency? Hard to say, but the end result is the same—another in a shamefully long line of examples of a Democratic politician putting the Democratic Party’s interests (coveting the supposedly all-important Green vote) ahead of the country’s.

If America expands its search for domestic supplies of oil and makes a major find, the psychological impact on the world’s energy commodity market will be instantaneous. The knowledge by the world’s oil market that America is serious about developing its own oil resources will have an immediate downward effect on world pricing. Obama is likely correct when he opines that the supply aspect of the equation won’t be affected by US drilling for several years. But the speculative/commodity-trading effect on pricing would be instantaneous.

(To wit: “The prospect of considerable supply, even though it may take some time to bring on line, changes decisions of energy buyers, hedgers and investors,” said William Whitsitt, president of the American Exploration and Production Council, which represents oil and gas companies. “There is no doubt in my mind that this can have a positive effect for consumers.”
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auuFx1yMkFdg)

And what will the oil sheiks in the Middle East do when the US finds and begins to develop its own significant oil resources? What does any business in any industry do when its near-monopoly is threatened by new, significant competition? It lowers prices to head off the competitors in a pre-emptive attempt to keep them at bay. Either way, whether it’s greater domestic oil supply or lower Arab oil pricing, America wins.

It’s not only the short-term lowered pricing that will accrue to our benefit. The mid- to longer-term supply effect of major US oil development will be quite positive as well. We’ll have affordable oil-based products for the next 20 years, with more of Americans’ money going to US companies in the U.S. instead of financing Arab sheiks’ next palaces. This, coupled with the increasing momentum—driven by the promise of free-market profits—of alternative forms of energy (they’re coming, and soon, no turning back those capital-market inventors now!) means that our energy future could soon be settled and secure.

But in this interim period, domestic oil exploration and increased oil production is the KEY to keeping the next 10-20 years or so as reasonably calm and economically-smooth as possible. We’ll see if President Obama is more concerned with the country’s long-term interests or simply trawling for short-term votes.

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