Perception is Reality
Back in 2005, Hurricanes Katrina and Rita were bouncing around the Gulf of Mexico like pinballs. The ‘bumpers’ were the nearly 2,900 oil platforms in the path of both storms. Yet, with all these targets, surprisingly only 109 platforms were destroyed despite the magnitude of the storms. Considering that we only produced about a third of our own crude, and the percentage of platforms destroyed was about 3.7%, why did the average price of a gallon of gas rise 50% from about $2/gal to $3/gal?
The answer…perception.
(chart from GasBuddy.com)
Yep…even though there was no long-term threat to Gulf drilling, the markets went crazy and gasoline went up 50% in the span of one month. There wasn’t a shortage. There wasn’t a nuclear war. California didn’t slide into the Pacific. The culprit was perception. Our commodity markets, as well as other markets, are controlled, in part, by emotion. In this case, the emotion was fear. Fear made everyone feel on-edge about the supply of gasoline drying up. Market movers played on that emotion and prices went up, up and away!
Once the populus came to its senses, prices retreated because they could not be supported for the long term. Popular perception drove prices up, but in my humble opinion, that set the stage for years to come. It seemed that any time a little piss-ant dictator had a bad bout of flatulence, the price of crude rose. Perception!
Now, how can perception help us? Yesterday, Speaker Pelosi called off-shore drilling a “hoax”. (h/t Michelle Malkin) She appeared to be repeating the shopworn cliches like ‘can’t drill our way out of this’, ‘it will take 10 years before we see a drop of oil’ or ‘we can only increase our production by about a million barrels which will reduce gasoline by only one cent’. Not only does Speaker Pelosi need some schooling on capitalism and market forces, I think a basic math course is in order.
As a businessman for the past 30 years, my take is that if we increase the supply, and more importantly DOMESTIC supply, the prices will soften. And although I am not an economist, I believe this will soften prices in two ways:
- The ‘perception’ of a flush oil supply will move speculators to where the ‘new’ money is to be made (remember the cool dot-com companies?)
- The international ‘perception’ will shift to show that America is serious about its energy independence.
Can we alter ‘perception’ by offshore drilling only? No way. We need to back it up by reducing subsidies and tax breaks to oil companies and take those monies and apply them to viable alternative fuels. And I’m not talking about ethanol (I’ll save that for another day in my ‘No Food For Fuel’ rant) – think electric, solar and hydrogen.
The only “hoax” is that perception is not real.
Michelle Malkin: Pelosi flails: Drilling is a “hoax”
AFP: Hurricanes Destroyed 109 Oil Platforms: US Govenrment
