The tax-cut effects of lower oil prices are the single-biggest economic story right now. Even with Fannie Mae’s terrible reported earnings, stocks are up 240 points in today’s trading. Why? Because oil is down another $4 to $116. That’s a more than 20 percent drop from its peak in mid-July, about the time President Bush launched his drill, drill, drill offensive to roll back the moratorium on offshore and domestic production, including shale and ANWR.
Bush removed the executive moratorium order, and now the entire country is clamoring for Congress to remove its moratorium. So far the Reid-Pelosi Democrats continue to dither and oppose new drilling. And as Kim Strassel wrote in today’s Wall Street Journal, the so-called “Gang of 10” compromise is a lousy deal. Obama is flirting with that compromise, but he has basically positioned himself as the anti-driller. Fortunately John McCain has repositioned himself as the pro-driller, and his rising polls show popular support.
But oil markets see the political tide in favor of drilling. As poll after poll is released — showing huge public support for drilling — oil traders are selling contracts short in anticipation of greater oil supplies in the future. And while all this is going on, the oil shock of the past six-to-nine months has curbed energy demand and promoted conservation. In other words, markets work. The combination of expected future supply increases and a pullback in demand is working to bring down prices.
Again, oil-price drops have a huge tax-cut effect on the economy. What many pessimists overlook, however, is that the tax-cut effect of lower oil will significantly help solve the credit-crunch problem in financial markets and at the large banks. Think about this. Declining oil enhances consumer purchasing power, raises profits, and gives everyone more economic strength. Folks struggling to pay mortgages will have a better time of it with lower energy costs. Pocketbooks will stretch further. Business commodity costs will go down and profits will go up. All that sub-prime mortgage paper sitting in bank portfolios will be worth more as homeowners can better service their mortgages in the wake of shrinking energy burdens.
The very key point here — which is being missed by so many — is that lower oil will solve the credit crunch. Just as the price shock of the last few quarters deepened the credit crunch and brought the economy to the edge of recession, today’s oil-price plunge will ease the credit crunch and strengthen economic growth. Not only that, but plunging gold prices and the strengthening of King Dollar show the counter-inflationary impact of lower oil. Real interest rates are rising in the Treasury market as oil prices fall.
The oil tax cut is good for growth, good for lower inflation, and good for solving the credit crunch that has plagued financial markets. In effect, the credit problems that continued to resurface are yesterday’s story, and the credit solution coming from plunging oil is tomorrow’s headline.
This is why the Goldilocks summer stock market rally has legs.