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Farrell: Obama Can Steer A Middle Course

Tuesday night on Larry Kudlow's show was interesting as always but a couple of issues stood out. Sean Tully of Fortune Magazine opined that oil could fall back to a range of $50-70 before too long. His rationale is that price range represents the marginal cost of producing the most expensive barrel and it is the marginal barrel that sets the ultimate price. I don't disagree with the marginal price theory.

I would add some premium for two additional things. Geopolitical risk ought to be factored in and some additional premium for having supply and demand so closely aligned has to be considered. The oil market has been stable if there is a 5-6% minimum spread between supply and demand. So today's demand of 86 million barrels a day would need to have world wide productive capacity of say 91 to 92 million barrels for prices to be stable. A 10% spread between the two would see prices go down. My conclusion is that around $100 is the "natural" price. But how good would it be for growth if oil did go back to $70!

Senator McCain delivered a strong supply side economic speech recently and pledged to fight to extend the Bush tax cuts and try to lower the corporate tax rate from the second highest in the world at 35%. Senator Obama seemed to back off of some of the primary campaign rhetoric about taxes and said some tax increases could be postponed. He also said that, yes, the capital gains rate should go up, but he softened (at least to my ears) the pitch as to how high. He even said that for small business startups, there should be no capital gains at all.

Forget that there seems to be an inconsistency that on the one hand no taxes are good for business development and job creation and on the other hand if you're "rich" you should pay higher taxes. The question Sir Larry posed was can Senator Obama successfully tact to the middle ground on this all important tax issue.

The rest of the panel last night said he couldn't since his primary campaign stance was so strong and clear. I think he easily can, and pray that he does. If John McCain can become a supply sider after voting against the Bush tax cuts, then Senator Obama can steer a middle course. We all know politicians, of all stripes, say what is necessary to get votes. In a primary, a candidate needs to solidify the extreme wing of his or her party to get the nod, and then will usually change the message to appeal to the general electorate.

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Vincent Farrell, Jr. is a Principal of Scotsman Capital Management and a regular contributor CNBC.