The big news yesterday was the discovery of a possible new reserve of oil in the Gulf of Mexico. There is a lot of uncertainty surrounding the discovery--how much is there? how long will it take to start pumping?--but one thing is certain: the discovery should lower today's prices. Let's take a look at some reasons why.
First, let's suppose we are dealing with an uncertain new reserve. That is, we think there is some oil there, but we don't know how much. Oil reserves are always uncertain. We don't really know how much oil is in any oil field. So what effect does adding an uncertain reserve to an already uncertain reserve have? It will probably lower prices in the short run.
Current oil prices are based on current information about the flow of oil and future expectations of the remaining stock. The higher the expected future stock, the lower prices will be today. With yesterday's news, The expected future stock increased. We don't know by how much, but as more information comes out, that expectation will be solidified. The higher that expected future reserve, the lower the price will fall in the short run.
But, you say, it will take at least ten years to even start to pump oil from the new field. That's true, but oil 10 years from now is a perfect substitute for oil today. Knowing that we have a reserve that will be ready for use 10 years from now means we can use the current reserves faster--today. Without the new reserve, scarcity of oil would put upward pressure on the price, encouraging conservation and slower withdrawal. But the promise of a future pool of oil means the scarcity fear is somewhat alleviated, and the upward pressure on prices is tempered. Prices will be lower today and the expected price path of future oil shifts downward.
So there you have at least two reasons why yesterday's news is good news for current oil consumers, and bad news for those hoping to invest in alternative technologies.
