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Solving Bush’S Oil Crisis
W. must go short to reclaim the investor-class vote.


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Larry Kudlow

You might think that George W. Bush will be the overwhelming choice of shareholders in his bid for re-election. He cut taxes on capital gains and dividends while Kerry wants to undo them. The Democrats oppose limits on runaway lawsuits that decimate corporate profits. They also want to double-tax profits earned abroad and impose price controls on domestic health-care providers and pharmaceutical companies.

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But the latest reading on the Rasmussen overnight polling survey of likely voters shows Kerry ahead of Bush 48 to 45 percent. This shocking result should be a wake-up call to the Bush campaign. Investors are a core Bush constituency. It seems that today’s higher gasoline prices and lower stock market averages are making for a nasty political mix that’s turning off investors to Bush.

Already, the Nasdaq has toppled 18 percent and the Dow and S&P have dropped 9 percent from their early-year peaks. Bush might still win despite these disappointing stock market figures. But if he does, he will buck the trend of the past four elections.

Over the first nine months of 1988 and 1996, stocks were up more than 10 percent in pre-election trading. Both times the party in power in the White House was re-elected: George H.W. Bush as Reagan’s heir in 1988 and Bill Clinton with a second term in 1996.

During the first nine months of 1992, however, stocks were about flat. Predictably, Papa Bush was defeated. In March of 2000 the stock market began a steady slide, thereby undercutting the Clinton-Gore prosperity argument and helping challenger George W. Bush win by a razor-thin Electoral College margin.

Should stocks continue to slide and oil continue to rise in the weeks running up to the election, it will be the handwriting on the wall of a Bush defeat.

While economists in both political camps are intensely arguing over jobs and the so-called middle-class squeeze, they ignore the electoral potency of the stock market. Two decades ago, only about one in eight U.S. households owned shares, so stocks didn’t really matter in political terms. Today nearly half of all households own shares, with almost two out of every three voters belonging to the investor class.

Recent polling data show a big Bush opportunity here. Sen. Kerry lost 9 percentage points from the investor vote following his speech at the Democratic convention in Boston, according to an Investor’s Business Daily/TIPP survey. Surely the president can do a better job of reminding shareholders of his pledge to make the dividend and capital-gains tax cuts permanent. A renewed push on personal savings accounts for Social Security reform would also be welcomed by the investor class, as would a surprise move toward pro-growth tax reform and simplification (as recently argued by House Speaker Dennis Hastert).

But if you scratch an investor deep enough these days you are likely to find that their biggest worry is spiking energy prices. The president has been silent on this.

At the beginning of the year, oil was at $30 a barrel while the U.S. and Chinese economies were booming full-speed ahead. Now, however, even though the world economy has slowed, oil has shot up to $45. Why is this? The answer is that wave after wave of terrorist threats, especially in Iraq and Saudi Arabia, have added a fear-factor risk premium of as much as $10 to $15 a barrel. Oil-supply disruption threats have also come from Russia and Venezuela.

Bush must now answer why the U.S. would let terror threats disrupt our stock market and economy. Solving this is exactly what the Strategic Petroleum Reserve (SPRo) is there for. As a last resort, reserves should be used to counter these terrorist-related oil-price spikes.

Behind the scenes, oil-market traders, knowing they are back-stopped by continuing purchases from SPRo, keep betting on higher prices by buying contracts with impunity. As long as the U.S. keeps adding to its reserves, traders are confident of a one-sided market that will keep pushing oil prices much higher than softening commercial supply-and-demand conditions can justify.

If the administration would simply cease filling SPRo, or better yet begin releasing small amounts of crude oil reserves onto the market, then oil markets would become two-sided again. This would force a rapid unwinding of long positions that would bring down oil prices by $10 a barrel or more. It would electrify investors (and consumers) and would surely contribute to a big pre-election rally.

Thirteen years ago Papa Bush employed a similar tactic during the Persian Gulf War. Oil prices crashed.

Sometimes politicians have to act like short-term traders and weigh in when least expected. In the political mind’s eye of the investor class, a government action to short oil would make a whole lot of shareholders willing to go long Bush.

— Larry Kudlow, NRO’s Economics Editor, is CEO of Kudlow & Co. and host with Jim Cramer of CNBC’s Kudlow & Cramer.



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