Analysts Expect Higher Oil Prices with Bush Victory

The good news is that oil has dropped 10% since last Wednesday, dipping below $50 a barrel. The bad news is that this is another profit-taking slump. Traders are squaring up positions ahead of the announcement of the winner of the American election. With any luck, there will be a winner announced between the closing of the polls and the opening of the oil pits (but there is no guarantee). To hear the oil market experts tell it, four more years of Mr. Bush is worth about around $5 a barrel to them.

The reasons for the oil-bullish view of a second Bush term start with the Strategic Petroleum Reserve. Created by congress to deal with the oil market shocks of the 1970s, the SPR holds some 670 million barrels of crude with a “capacity” of 700 million barrels. With a small exception for the hurricanes this year, the Bush administration has been committed to filling up the 30 million barrel gap. Mr. Kerry is perceived as less determined to buy oil for the SPR while prices are high. Unlike Mr. Bush, who supports filling it at any cost, he would only buy on dips and might release on price spikes more readily.

Another reason for a stronger oil market if Mr. Bush is sworn in again is geopolitical. Iran has the second largest reserves of oil and gas by most measures, and it is a theocracy bent on building a nuclear weapon. Mr. Bush has labeled it a member of the “Axis of Evil.” Pure and simple, a second Bush term will almost certainly see some kind of saber-rattling or even direct confrontation with Tehran. This will threaten supply and drive prices up. Mr. Kerry, more multi-lateralist, is expected to be less confrontation in general. Tangentially, neither candidate can stop Iran getting the Bomb.

Another reason for higher prices for crude and refined petroleum under Mr. Bush is his approach to solving the nation’s oil problem – more drilling. Mr. Kerry’s approach requires conservation and demand reduction. Lower demand will automatically pressure prices to the downside. More drilling does nothing to address the immediate shortfall, but it ensures short-term price increases. When the new oil fields come in, and when pipelines are build to move the oil, the heightened supply will help lower prices – someday.

Of course, Mr. Kerry does have a more environmental streak in him that Mr. Bush. This might be the one area that reverses the roles. Refining oil is a messy business, and building new capacity in the US would likely be harder under the greener, Kerry administration. With no new capacity, heating oil, gasoline and aviation fuel will remain expensive even if crude prices fall.

That said, it is tempting to agree with Tim Evans, senior analyst at IFR Energy Services quoted in a Reuters report. He said, “A Bush status quo results in somewhat higher oil prices both in the short and the longer term, in my view."


© Copyright 2004 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.


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