The McCain Oil Price Premium

When you consider it, it is obvoius that there is a differential in oil pricing that will result from the coming US presidential election.  But for some reason no one has brought this up anywhere, as far as I can tell.  So let’s take a look.

I first suggested this subject in my opening remarks at FiRe 2008, and my thinking hasn’t changed much since then.  Here is what I see for oil pricing in the near term future:

Because it is keying primarily off of speculation, today’s pricing will continue to rise until the November election.  I don’t know how far they can take it, although if you take a look, it has been on a straight line increase for the last six months or so, and I see no reason for this not to continue during that term.

After the election, we have two different paths.  And this is where it gets fun, I’ve found, because my call seems to run counter to the intuition of a lot of consumers.

If McCain is elected, the price will fall just slightly, bracketed at the low end in the $125 / bbl range.  The chances for its continued rise after this are high.

If Obama wins, the price will drop more, probably bracketed at the bottom in the $95 / bbl range.  The chances for continued increases are lower, and the chances of a lower rate of increase are higher.

In other words, the US and global economies will be under less pricing pressure for oil if Obama wins.

Here is my reasoning:

The price today contains about a 40-45% premium from speculation (I agree with Soros on this).  Speculators love fear, war, uncertainty, and anything else that leads to volatility.  Additionally, nations like Iraq, Venezuela, Iran, Saudi, etc. that have responded negatively to US military moves in the Mideast by pumping or delivering less oil to the US (or raising prices, or restricting access, etc.), are more likely to continue doing so under a leader vowing to continue the military footsteps of the Bush administration.

Conversely, if Obama makes moves of withdrawal from Iraq of any real kind, and indicates to the Middle East that he is seeking peace, the result will be a reduction in speculation and volatility, and an increase in volumes made available to the US and world markets.

As for the numbers, the routines for getting the exact figures are a bit hard to define – and, of course, they may be inexact.

But I have no doubt regarding the fact of paying a McCain premium, any more than one would doubt we are now paying a Bush premium. 

Because oil pricing is probably the most important economic parameter of the decade, this differential ought to be part of any discussion of election politics, regardless of the points of view of those involved.

I hope that this spurs that debate.