Like a thirsty desert sojourner at last coming upon the oasis, finally, the US
Republican Party has stumbled across a genuine domestic policy issue that it
feels can work to its advantage - the purported connection between high current
prices for gasoline and government restrictions on oil drilling in the Alaska
National Wildlife Refuge (ANWR) and along America's coasts.
Since at least September 11, 2001, it has been Osama bin Laden's threatening
visage that has been the rejoinder when GOP politicians are asked if they have
any solutions to any and all domestic problems. Up until very recently, the
party had been choosing to continue its all encompassing claim to the national
security brand identity; with polls showing that issue falling from
primacy in voters' minds, being replaced by domestic issues such as
unemployment and healthcare, many party professionals were reported to be
deeply pessimistic about their chances in the November elections, especially in
regard to Congress.
But then came the oasis's shimmering visage of hope. Now, the Republicans are
attempting to shift responsibility for all the myriad troubles and displeasures
that are flummoxing the American psyche (with now over 75% of Americans telling
pollsters that they believe the country is on the "wrong track.") solely to the
drilling restrictions; not only are they the sole cause of high gasoline
prices, but they also are the root cause of the current economic slowdown
("what credit crisis?"), and the foreign policy conundrums posed by having to
deal with unpleasant and un-American oil exporting potentates.
These include Venezuela's Hugo Chavez, and those who, like the House of Saud,
have the temerity to put their own national interests above those of American
SUV drivers. In another example of the party's staying on campaign message iron
discipline that makes the conformity of Star Trek villains The Borg look
like 1960s Berkeley folk singers, from all over the country, in campaigns
ranging from John McCain's for president to those running to be local town dog
catchers, every day and in every way, the Republicans have made the offshore
drilling platform the pulpit of a new faith promising a miraculous deliverance
from the oppression high gasoline prices are causing to this summer's American
dream.
First promulgated by the US Congress in 1980 in the case of ANWR, and in 1982
in the case of the outer continental shelf (the coastal drilling ban was
fortified by a symbolic executive order from president George H W Bush in
1990), the restrictions have long been perennial talking points among
Republican ideologues. Still, the hard push on these issues is something new;
previously, fearing the alienation of suburban, environmentally minded "swing"
voters, the bans would customarily always get renewed, even when the
Republicans held strong Congressional majorities.
But now, in the outrage over high gas prices, the party's ever-ubiquitous focus
groups have discovered that the issue plays particularly well among a key
desired demographic, the uninvolved voter, less educated on the issues, who
only desires from the political system the ability to drive his big-engined,
big-throated gas guzzler as fast and as far down the highway as he can, and who
doesn't understand why "the gummint" is putting restrictions on the
constitutionally sanctioned pursuit of his happiness.
Currently, it is being claimed that lifting the restrictions would have such a
powerful effect that, even while they are still in place, just the possibility
that the areas might be opened for exploration and exploitation is enough to
provide relief to beleaguered US gas consumers.
On July 14 of this year, President George W Bush appeared in the Rose Garden to
lift the administrative order on coastal drilling emplaced by his father 18
years previously,
"For years my administration has been calling on Congress to expand domestic
oil production. Unfortunately, Democrats on Capital Hill have rejected every
proposal, and now Americans are paying at the pump ... As the Democratically
controlled Congress has sat idle gas prices have continued to increase ... The
American people are watching the numbers climb higher and higher at the pump -
and they're waiting to see what the Congress will do."
Virtually immediately following the announcement it seems, crude oil prices on
the largest petroleum futures market, the New York Mercantile Exchange (NYMEX),
commenced a precipitous decline. After opening that day at $144.69, and trading
as high as $146.37 before the announcement, prices on the most actively traded
"front month" August West Texas Intermediate crude contract traded as low as
$142.49 before settling out the day at $145.18. The next day saw prices break
the $140 floor and commence the selloff in earnest, trading as low as $135.92
before closing at $138.74.
In a perfect example of equating coincidence with causation, Reagan-era
economic advisor Larry Kudlow, writing on his Moneypolitics blog, says this is
all resultant from the Bush initiative.
"When President George W Bush eliminated the executive moratorium on offshore
drilling a month ago, effectively launching the drill, drill, drill offensive,
oil was close to $150 a barrel. Since then, the barrel price has dropped to
nearly $120 as futures-market traders anticipate a major shift in federal
drilling policy."
Far more important than the relief to the beleaguered consumer is his
prediction of relief to the beleaguered Republican Party, as Kudlow drops the
fig leaf to reveal what this debate is actually all about
"Without even realizing it, the GOP drilling offensive has become a new
contract with America" - referring to Newt Gingrich's winning 1994 Republican
Congressional campaign platform. "And it appears to be working. The public is
putting aside global warming and choosing instead new-energy production, a
stronger economy, and more job creation. Voters want growth, not austerity.
They want Ronald Reagan, not Thomas Malthus."
So the overriding question then becomes, is it the prospect of offshore
drilling, of extra supply some time in the next decade, pulling down oil prices
now?
The question of causation in the financial markets can sometimes be tricky;
market action is designed to make money for those who do it for a living, not
to resemble some parlor detective game where once again Colonel Mustard is
found to have hidden the murder weapon. Still, the market frequently does leave
clues as to what's on its mind. You just have to know where to look for them.
What the drilling advocates are saying is that the prospect of increased oil
supply some time in the next decade from drilling in the now proscribed regions
is driving prices down for delivery in the next few months.
Strange as it seems, such a contention is theoretically possible. NYMEX oil
futures contracts extend out to December 2016. If people were expecting big new
future supplies, you could be seeing selling in those back month contracts,
perhaps hedged by buying of the contracts to be settled in the very near
future, a trading tactic called a calendar spread.
In a condition called backwardization, oil futures contracts for the long-term
future trade at a discount to contracts to be settled in the next few weeks. If
the Kudlow thesis is right, the current selloff should have seen more selling
in the longer-term contracts than in the current contracts, reflecting the
belief that supplies in the next decade will be more plentiful.
In reality, just the opposite has happened.
At the close on July 11, the last full day of trading before the announcement,
August oil topped out at $147.27. On that day, oil futures contracts for
delivery in December, 2015, peaked at $142. During the next 10 trading days
came over 2/3rds of the oil market selloff. On July 25, the by-then front month
September contract closed at $123.26, with December 2015 going out at $120.04.
From the peak on July 11 to July 25, the front month contract fell $24.01; the
December 2015 contract fell $21.96. It's hard to entertain an argument that
price-falls in the back months are dragging down the front months when the
front months are actually falling faster than the back months.
Rather than the miraculous power of drilling suggestion implied by the right, a
more reasonable explanation of what's currently driving down oil prices would
be new concerns that the economic
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