Allowing off shore drilling for oil will have a much more immediate impact on oil prices than Democrats opine.  Here's why.  Both producers  and purchasers of oil, base their decision making on the anticipated future supply and demand of oil.  It is well known that purchasers base what they will pay for oil on actual and anticipated supply and demand.  It is called the future's market, and much has already been written how oil has more than doubled in the last year.   Less well understood is that producers base their production levels on the anticipated future's price of oil, which will also have an impact on the future's market. 

 

Martin Feldstein an economist and former governor of the Federal Reserve, wrote an editorial in the July 1 issue of the Wall Street Journal explaining this.  Mr. Feldstein argues that oil producers consider their oil reserves in the ground as if it were cash in the ground.  Viewed from this perspective, economists are capable of predicting oil production levels.  Simply put oil producers will base their production levels on whether their oil reserves will earn more by selling the oil and investing the proceeds, or leaving the oil in the ground in anticipation of the oil being more valuable in the future.  So, if oil producers are, for example, able to get a 6% per year return on investing cash, but they anticipate that the price of oil will increase at 10% per year, they will produce less because they can get a better return on the oil by simply leaving it in the ground.  On the other hand if they anticipate that the future price of oil will be rising at less than 6%, or perhaps will even fall, they will produce more oil.

 

Currently oil prices have been increasing because oil inventories are tight.  However, if off shore oil drilling is approved, and oil producers anticipate that the future price of oil will be lower because of future increases in supply, then the oil producers will increase their production levels to sell the oil now at the higher prices.  In turn oil prices will come down and ultimately reach a lower price equilibrium at a price where it does not make economic sense for the oil producers to pump increasng amounts of oil.  The speed at which this will happen will be exacerbated by the downward pressure on oil prices, as purchasers will pay less for oil because of both actual and anticipated supplies of oil.  In short the price of oil will come down much faster than the time it will take off shore drilling to actually increase the supply of oil.  That is why drill, drill, drill should be the mantra of Washington politicians