The Weekly Carboholic: oil prices fall, but not because of Bush

Posted on July 16, 2008

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carboholic

On Monday, President Bush announced that he had reversed an executive order originally put in place by his father that restricted drilling on the outer continental shelf (OCS).

Yesterday, crude oil prices fell $6.44, the second largest dollar drop in history.

Coincidence? Larry Kudlow at the National Review would have the American people believe that the two are intimately related. That assumes that there wasn’t anything else going on yesterday that could have driven down prices, and it assumes that a large dollar drop in crude oil prices is the same as a large percentage drop. Both assumptions are wrong.

First, there was something else going on yesterday that financial markets watch far more closely, and can impact market performance far more, than nearly anything a President can do – the Chairman of the Federal Reserve, Ben Bernanke, was testifying before the Senate Banking Committee partly on the effect of high oil prices on the economy. Bernanke said that oil prices were impacting the ability of consumer to purchase goods and services and that high oil prices would slow the economy through the rest of the year. With higher inflation being driven by high oil prices, demand for oil was expected to fall, and so the price of crude oil fell after Bernanke’s comments.

When markets respond to news from the day before, they move at the opening bell. If you look Tuesday’s crude oil price chart at right, notice that the price didn’t move at all at the start of trading, and only fell by about $2.00 before Bernanke started speaking about how high oil prices would reduce demand. In other words, contrary to Larry Kudlow’s comments at the National Review, the oil market didn’t respond much at all to President Bush’s lifting of the Presidential moratorium on OCS drilling. Which makes sense, since the President did it to put political pressure on the Democratic leaders of the House and Senate, and not to produce real crude oil price reductions.

Second, just because a drop of $6.44 from opening to closing of the market is the second highest dollar drop in history doesn’t mean it’s meaningful. The greatest dollar drop in crude oil prices – $10.56 – occurred when President Bush I announced that he’d release oil from the Strategic Petroleum Reserve (SPR) before the first invasion of Iraq. At the time, however, the price of oil was $32.00 per barrel, so the drop represented a whopping 33% reduction. Yesterday’s reduction of $6.44 came off a baseline of $146.34, so the percentage drop was a measly 4.4%. That’s not even enough to put the loss in the top 100.

In other words, Kudlow is trying to give the President, and by extension the GOP and presidential candidate John McCain, credit for pretty much nothing.

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Some scientists have proposed that humanity start consciously and intentionally modifying the climate in an attempt to reverse global heating, as opposed to the unconscious and unintentional modification that our historical consumption of coal, oil, and natural gas represents. The modifications are collected under the term “geoengineering” and range from the merely difficult to the nearly wildly impossible. A couple of examples of geoengineering ideas are sequestering carbon dioxide (CO2) using man-made ocean algae blooms (likely creating massive man-made dead zones in the process) and using aircraft to seed highly reflective sulfur dioxide into the stratosphere (possibly destroying the global ozone layer, and increasing global incidence of skin cancer worldwide, in the process). But given the potential severity of global heating, these approaches still deserve study. After all, if one of them worked with minimal side effects, then it would give human civilization more time to adapt and migrate to zero-carbon energy sources.

Unfortunately, according to an ABC news story, using reflective solar shades (giant mirrors in orbit) did not stop the effects of global heating. The climate models used were similar to the models used by the IPCC, and while they confirmed that a massive orbital sunshade could cool the planet down, it didn’t result in equal cooling. The reason is that a sunshade would be most effective if orbiting the equator, and so while the equator would cool down significantly, the poles would still warm up, ice cover would still drop, sea levels would still rise, weather patterns would still change drastically, plant growth patterns would still change, and ocean acidification would still occur due to high CO2 concentrations. Put simply, the model showed that this particular geoengineering project could bring the average global temperature, most of the really bad problems that are associated with global heating happen regardless.

Although [the University of Bristol study team’s leader Dr. Dan Lunt’s] model suggests sunshades are better than nothing, he would rather see efforts focused elsewhere.

“My personal opinion is that we should be focusing our time and money on actually reducing emissions,” he says, “rather than some manmade monstrosity in space.”

Especially since this particular geoengineering project doesn’t actually do any good.

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Russia has historically maintained ice floe labs that are put on pack ice and float around the Arctic Ocean. Over the last 60 years, Russia (or the Soviet Union) has placed 34 stations. This year’s station, North Pole-35, was placed in September 2007 and was expected to be manned and operational until early August, 2008. However, the Russian scientists and the entire climate and pollution monitoring station were removed a month early because their ice floe had melted dangerously small. The ice floe used to be 1.25 miles by 2.5 miles but had shrunk down to about 0.2 miles (1000 feet) by 0.4 miles before the scientists and their equipment were removed by Russian vessels. Global heating-driven Arctic warming is the most likely cause.

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Image credit: CNN Money

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