More economic illiteracy from Mark Warner

As the question of oil supply continues to dominate the U.S. Senate campaign here, Mark Warner expressed his skepticism on Jim Gilmore's assertion that drilling for oil - even if it would take years for the oil to get to market, would reduce its current price (Daily Press):

"There's no serious policymaker or economist who predicts that," Warner said. "I
know it's political season, but some of this is basic math."

Actually, Mark, it's about economics, but you've already proven you know nothing about that, so you might want to pay attention.

Like most commodities, oil not only has a current price, it also has future prices. One of the biggest drivers in the current price of oil has been the surge in its future price (if a gap is created between the two, an investors can sell the higher and buy the lower, ensuring a nice profit until everyone else catches on and the two prices return to rough equal). The future price of oil is driven by several factors - turbulence in the Middle East, the rise in demand from Communist China and India, and no major exploration moves by the United States.

So the idea that a decision to drill more now would have no effect on oil prices is based on pure economic ignorance. How can I say that? Take a look at this (Larry Kudlow, NRO - The Corner):

In a dramatic move yesterday President Bush removed the executive-branch
moratorium on offshore drilling. Today, at a news conference, Bush repeated his
new position, and slammed the Democratic Congress for not removing the
congressional moratorium on the Outer Continental Shelf and elsewhere. Crude-oil
futures for August delivery plunged $9.26, or 6.3 percent, almost immediately as
Bush was speaking, bringing the barrel price down to $136.

. . .

Traders
took a look at a feisty and aggressive George Bush and started selling the
market well before a single new drop of oil has been lifted. What does this tell
us? Well, if Congress moves to seal the deal, oil prices will probably keep on
falling. That’s the way traders work. They discount the future. Psychology and
expectations can turn on a dime. The congressional ban on offshore drilling
expires September 30, so that becomes a key date.

Indeed.

President Bush's lifting of the ban does two things: removes a barrier to future drilling, and all but ensure the Congressional barrier is gone as of October 1 (unless Congress can override a Presidential veto on maintaining the ban - highly unlikely now).

So, not only did the market react to future drilling (contrary to Warner's claim), it actually reacted to expected future drilling. Not only has this happened "before a single new drop of oil," it happened before anyone could even begin drilling by law.

Imagine how far it would fall if, say, the candidate in Virginia who made support for oil drilling his signature issue was elected to the U.S. Senate!

Cross-posted to the right-wing liberal