It's pretty ironic, that on the day that President Obama announcessupport for a significant expansion in oil drilling in this country (offshore), the price of crude oil (futures) is HIGHER on the day. The price of crude oil (WTI) is up over 4 dollars in the last 4 days of trading, rising more than a dollar yesterday. In fact, crude oil is up another dollar this morning. (Get the latest oil prices here.)
Don't forget in the past that Republican partisans chanted "drill baby, drill" in mid 2008 as the solution for lower energy prices to the American consumer.
Well, here we are, and despite a major announcement by the President yesterday on the expansion of drilling, the price of crude oil has moved higher, not lower. This is in direct contrast to all those folks that said in 2008 that expansionary drilling announcements from the government would immediately lower oil prices.
It's important for observers to realize that, while more drilling may help domestic supplies over the very long term, oil price formation is dominated by speculative money flows today.
So in this case, despite a major announcement by the President, which could easily be viewed as leading to larger supply, oil prices rise.
In fact, since financial interests are now the dominant participants in oil price formation, they are primarily reacting to other issues of more importance to themselves, notably end of quarter "marking" up of positions, buying ahead of potential 2nd quarter investment flows into commodities by large investment institutions, and finally speculating based on the level of the U.S. dollar vs. other currencies.
The fact that future drilling may increase substantially is just not important enough of a factor to move the price needle, given the primacy of other views held by speculators.
I hope this helps people understand the significant difference between the acute, financially driven nature of higher energy prices vs. systemic energy supply issues.
It is critical for policy makers not to ignore the gorilla in the room, which is the clear dominance of financial interests in our crude oil and other consumable commodities markets.
They must be reigned in if these markets are going to reflect true supply and demand rationale once again.
Announcements of potentially more supply are one thing, but if policy makers want a truly comprehensive energy policy, the role of financial speculation cannot be ignored.
Please see the blog site accidentalhuntbrothers.comfor more information on derivatives reform and excessive speculation in consumable commodities markets.
Michael W. Masters is the founder and managing member of Masters Capital Management, a global investment management firm that trades and invests in public and private domestic and international bonds and equities.