Crescenzi: Obama Effect on Oil

Barack Obama
Barack Obama

In early July I published a note discussing how expectations of an Obama win could knock $40 off the oil price. The note is below. One piece of the puzzle was put in place today with Obama mentioning that he might tap the Strategic Petroleum Reserve (SPR). He said as much in a speech he delivered on energy today in Michigan. Obama said "we should sell 70 million barrels of oil from our Strategic Petroleum Reserve for less expensive crude, which in the past has lowered gas prices within two weeks."Obama said many other things, such as investing in energy infrastructure, changes in the tax code to encourage energy conservation, and other ideas.

Additional impetus I believe for today's and the recent oil drop is coming from China's cutbacks on energy use amid efforts to cut pollution for the upcoming Olympic games. There were also likely bad longs betting on greater impact of the storm currently in the U.S. gulf than has thus far been the case.

Here is my the note I sent a number of weeks ago:

If Barrack Obama wins the presidency, the price of oil could fall $40 per barrel. The financial markets will discount the possibility before hand, at least partially. There are three ways in which this could happen:

1) As was the case during the Clinton administration, Obama might be more inclined to intervene in the foreign exchange market to support the value of the dollar. The U.S. has not intervened in the FX market since Treasury Secretary Robert Rubin did so in September 2000 when the Treasury sought to support the Euro, then costing about 80 cents per dollar (yes, the cost has almost doubled since then). Intervention or the threat of intervention could shave $20 off the price, based on the divergence in price between oil quoted in dollars versus that of other currencies.

2) Obama will speak in a more concilatory tone toward nations in the Middle East. If he does, some of the risk premium would likely be extracted from the oil price.

3) Energy conservation and investment in energy infrastructure are likely to increase if Obama wins, as it will be part of his mandate. Announcements of a nationwide effort to both decrease consumption and increase the supply of energy would have an announcement effect on the energy markets, lowering energy prices and burning speculators.

A fourth reason: Obama would be more likely to tap the SPR than Bush has been.

Points 2 and 3 are probably the most bankable ideas, but the mere threat of point 1 is still enough to impact the markets. More: Click for Latest Economic coverage ...


Tony Crescenzi
Tony Crescenzi

Tony Crescenzi is the Chief Bond Market Strategist at Miller Tabak + Co., LLC where he advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. Crescenzi makes regular appearances on financial television stations such as CNBC and Bloomberg, and is frequently quoted across the news media. He is also the co-author of the just-revised "The Money Market" and "The Strategic Bond Investor."