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Politicking and oil are proving a heady brew
Paul Lin
11/21/2004

US President George W. Bush seemed unable to compete with Senator John Kerry in the three election debates. Unfavorable polling results for Bush, however, won't necessarily decide the election. Voters may translate Bush's lack of eloquence as meaning that he is an honest, down-to-earth man. More of a threat to Bush are surging oil prices.

Oil prices closed last week at US$55 per barrel, a 65 percent increase on early this year. Prices fell after peaking at US$50 in August, but climbed again mid-last month to break the US$50 mark earlier this month. Some experts predict oil prices may reach US$60 or even US$80.

When oil prices fall, stock prices go up. When oil prices go up, stock prices fall. This is how stock markets, especially in the US, have behaved recently. Last month, I noticed that during its stock trading broadcasts, the TV network CNBC had added a line to the Dow Jones and NASDAQ indexes giving the latest oil futures prices. The fluctuating oil price is now being used as reference by stock investors. Though US companies are doing well according to recent financial reports, the oil-price hike has pushed the Dow Jones index below 10,000 points.

There are many reasons for the oil price hike, mainly the recovering world economy, which is bringing increased oil consumption even as oil reserves diminish. China, for example, has become the second-largest oil importer because of its burgeoning economy and plans to build up strategic oil reserves.

More importantly, however, is the fact that peaking oil prices are a direct reaction to several incidents, such as the struggle between Russia's oil companies and the government, hurricane damage to oil rigs in the Mexican Gulf, the oil worker strike in Nigeria, sabotage in the Middle East and shrinking oil reserves in the US. It would also be interesting to study what role speculators have played.

Some reports say this wave of rising prices is having a critical impact on hedge funds, bringing to mind George Soros, founder of the Quantum Fund. He has kept a low profile since the Asian financial crisis, but in the presidential election, Soros, who opposes communism and detests authoritarianism, is also determined to see Bush lose. He has made personal donations to the Democrats and also mobilized his friends to do the same. No wonder there is speculation he may be connected to the rises, since they restrain US economic growth and help Kerry's attacks on Bush's economic policies. The invasion of Iraq may also have worsened the oil issue.

A research firm studying US stock performance since 1900 found that when the Dow Jones index drops in the first four months of an election year, there is an 80 percent likelihood the ruling party will lose the election. During the first four months of this year, Dow Jones dropped 228 points, a 2 percent decline.

Stock performance from late July to late October is also a valuable reference. A bearish market during that period results in a 70 percent likelihood that the White House will see a new president, while a bullish market produces an 80 percent likelihood that the incumbent president will stay. From July to the end of last month, the Dow Jones dropped 3.4 percent. With election day nearing, will the stock market continue to be sensitive to oil price fluctuations? Let's see if God will bless Bush.

No matter who wins, oil speculation should stop. Even if prices don't drop, they should not rise further. After a historic high late last month, basic metals such as aluminum and copper have seen a significant drop in price. OPEC chairman Purnomo Yusgiantoro has said that oil prices will continue to rise until later this month. If the surge in oil prices really is aimed at defeating Bush, it should subside by the end of the month.

Paul Lin is a commentator based in New York.



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