Kenneth D. Gartrell

By: Kenneth D. Gartrell

One of the most remarkable aspects of the present climate for oil prices is the extent to which public policy makers and political pundits are ignorant of and therefore able to demagogue an otherwise understandable economic question and confound issues to the point where it is political uncertainty more than anything else that is driving up the price of oil.

There are many aspects of the demagoguery, but one key element is the claim that increases in future oil prices will have no impact on prices today. The educated economic mind can reasonably ask, “Why do we allow the demagogues to dismiss proposals to start discovery of new oil today for future exploration with a mindless claim that it will take too long to deliver the oil and, therefore, have no impact on current prices?”

With a little bit of clear thinking it should not be difficult to understand that the price of oil today is an unbiased estimate of ALL present and expected future levels of supply and demand for oil.

It should be obvious that a decision to unexpectedly open all exploratory avenues in the United States today would introduce a much larger expected future supply of oil on the market. The effect of a DRAMATIC INCREASE IN EXPECTED FUTURE SUPPLY TODAY WOULD BE A MATERIALLY LOWER PRICE TODAY AND A CORRESPONDING INCREASE IN THE SUPPLY TODAY. Investors will adjust their expectations rapidly and producers with oil on hand will bring more to market now rather than face uncertain future competition for the US market. In this case, a bird in the hand is certain to be worth more than two in the bush.

It is maddening to see market ignorance dominate the discourse on the present level of oil prices. We have to wonder, “How is it possible to believe anything said in the realm of political talk on this or any other issue?” It is very disturbing that simple minded commentators know nothing about asset pricing. They can be forgiven because like their office seeking icons, they have probably never studied enough mathematics, statistics or economics to know better. Yet, the most disturbing thing is that a host of long-time political figures display an even greater level of ignorance (or just plain intellectual dishonesty) about markets and prices. They generally act like infants, or better yet parrots. Public officials are irresponsible to demagogue while failing to deliberately and prudently consult competent experts.