Monday, August 11, 2008

Drill, Drill, Drill Is on a Roll, Roll, Roll

Nearly two-thirds of Americans (64 percent) support offshore oil drilling, according to a new Rasmussen poll. And 42 percent say offshore oil drilling would have the biggest impact in terms of reducing oil prices. Only 20 percent of Americans now oppose offshore drilling. And in terms of reducing oil prices, building more nuclear plants and developing more fuel-efficient cars rate only 16 percent.

Public support for drill, drill, drill clearly continues to grow. And that’s one key reason why oil prices continue to fall. In today’s trading oil is off another $2 to $113 a barrel, despite the war between Russia and Georgia. According to government sources in Georgia, the Baku pipeline is still functioning and oil is flowing through Georgia.

Let me return to my theme that the plunge in oil prices is solving the economy’s problems. In today’s stock market trading, while overall prices are up 100 points, retailers and banks are the leading sectors. This follows on last Friday’s huge 300-point jump, largely on the strength of collapsing oil. Retailers and financials led Friday’s action also.

As oil and gas pump prices descend, homeowners will have more extra cash to pay their mortgages on time. This means the mortgage bonds owned by banks are worth more. Hence the oil drop solves the credit crunch as well as the housing decline.

And there’s more. Gold has dropped another $35 today to $830 an ounce. The greenback is up again. This means of course that the oil drop solves the inflation problem as well. Essentially, we are witnessing a complete reversal of the damaging oil shock that has been the single-biggest economic depressant this year. You couldn’t ask for any better news.

And I want to repeat my view that the reversal to lower oil prices is a function of a) lower energy demand through greater conservation in response to the prior price increase and b) the likelihood that Congress will reverse its ban on drilling. Oil traders are selling the black gold in anticipation of greater future energy supplies. The InTrade prediction markets are showing a 45 percent probability that the congressional ban on drilling will be removed before year-end. In early July this contract was less than 10 percent. We are watching a combination of economic and political forces acting to depress oil prices.

My suggestion to Sen. John McCain, who has capitalized on the drilling surge, is to maintain his drilling mantra every day on the campaign trail. Sen. McCain has Obama on the run on this issue and the Arizonan should not let up the pressure. In some sense President Bush launched all this in back-to-back speeches in mid-July. He removed the executive ban on drilling, thereby capturing a public revolt against higher energy prices. McCain must ride this wave for all it’s worth.