- The Washington Times - Thursday, March 16, 2000

With all the media chatter this past weekend about jawboning the Organization of Petroleum Exporting Countries and getting oil prices down, here's a thought that has not yet occurred to the punditocracy: Rising oil prices are a political economic hex for incumbent presidents.

Here's an important factoid: Each of the past three bear market recessions have been associated with sharp oil price increases 1973-75, 1979-82, and 1989-90. Unemployment and inflation went up together during these periods.

And as the misery index rose, presidential fortunes fell. Just ask Gerald Ford, Jimmy Carter and George Bush (senior). They all learned the hard way.

Right now Al Gore is riding high on the coattails of the Internet prosperity. In Houston last Saturday night he told a crowd that they must guard against a return to the Bush-Quayle administration, which, he said, led to "the worst depression since the Dust Bowl days of the 1930s." Even for the Great Dissembler, this one's a long reach. Mrs. Clinton took up the mantra in her New York Senate campaign: "And George Bush and Rudy Guiliani want to do a U-turn back to the days when it didn't work for any of us."

The Gore-Clinton ticket, however, may be in for some unpleasant petroleum arithmetic. OPEC spokesmen are suggesting their March 27 meeting will unlock only 1 million to 1.5 million barrels of new production. But they took out 4 million barrels last year. That was $20 ago. And the International Energy Agency believes 2.3 million new barrels will be necessary to replenish inventory shortfalls. So oil prices may not decline for quite some time.

Now, it is unquestionably true the high-productivity Internet economy is much more energy-efficient than the old smokestack-dominated economy. Since the mid-1970s, energy consumption per unit of real GDP has dropped 40 percent. Just in recent years the energy-to-GDP consumption ratio has fallen nearly 10 percent. "The Internet doesn't use that much energy," Dallas Fed energy economist Steve Brown told me in an interview.

What's more, the computer economy runs mainly on electricity, where prices have been flat. So the oil price spike has mainly affected old economy stock performance, while the new economy Nasdaq continues to reign supreme.

Meanwhile the consumer service economy is increasingly electricity-run. Electric power generation comes mainly from coal (51 percent), nuclear (20 percent), and hydrowater (9 percent), all of whose prices have gone nowhere.

However, let's not forget that you have to drive (or fly, or take a train) in order to purchase consumer goods and services. And driving means paying expensive gasoline prices, which are moving toward $2 a gallon. Call it a motorist tax increase. Cyberspace buying may be one-third to one-half of all retail sales in the next five years, but presently it is less than 1 percent.

So oil-linked transportation cost increases are taking a big bite out of disposable consumer income and buying power. This is why consumer cyclical and non-cyclical stock groups have dropped 15 percent to 25 percent so far this year. Ditto for lodging stocks, casinos and recreation products, airlines, autos and food retailers.

Meanwhile, if the oil shock is taking a big bite out of consumption, that means it will depress production as well. So industrial sector stock groups like containers and packaging, heavy machinery, industrial transportation, railroads, trucking and transportation are off by an average of 20 percent this year. Again, it's the long arm of OPEC's price increase.

Now back to the Gore-Clinton prosperity gloat. And some more unpleasant petroleum arithmetic. In recent years the U.S. has imported about 4 billion barrels of oil annually. Since the price of crude oil has jumped $20, that leads to roughly an $80 billion transfer of income from domestic consumers to foreign oil producers. Think of it as a big tax increase. This $80 billion tax increase is going to depress the rate of economic growth this year; that's what the slide in blue chip stocks has been telling us all along. The prosperity rate is going to slow noticeably.

The U.S. economy has been trending along a 4 percent growth path in recent years. From the fourth quarter of 1999 to the end of 2000, this would ordinarily mean a $362 billion gain in real national income. But, the $80 billion oil tax increase will reduce this to $282 billion.

However, momentum from last year's strong second half is spilling over into this year's first quarter. Growth in the January to March period could be 5 percent at an annual rate, absorbing $111 billion of the expected yearly income gain.

That leaves only $171 billion, or $57 billion per quarter, left over for the remainder of the year. This translates to a sluggish 2.5 percent real economic growth rate during the spring, summer and autumn quarters. So the oil price tax effect may take its major toll right around election time.

Here's another problem. Bear Stearns economist John Ryding tells me that rising gasoline prices could move the year-to-year change in the consumer price index to 3 percent in February and 3.2 percent in March. This is well above the Fed's supposed 2 percent inflation limit, and will undoubtedly trigger several more credit-tightening moves.

So there's considerable risk the economy will be pinched by Fed tightening and OPEC tightening. The stock market has been pricing in this risk for many weeks. Even the Nasdaq may feel this pain, since its customers are old economy companies and new economy consumers, both of whom will suffer from the oil price tax increase.

If the Clinton administration had a real foreign policy, it could use its national security and financial assistance trump cards to bring OPEC to a 4 million barrel a day production replenishment. Kuwait and Saudi Arabia wouldn't even exist as independent states were it not for U.S. efforts 10 years ago.

Or, if the administration had a pro-growth tax policy it would quickly sign on to a repeal of the 1993 gas tax increase, and a broad-based reduction in personal and business tax rates. Or, if it had a pro-growth deregulatory policy, it would repeal the moratorium on offshore drilling and open the Arctic National Wildlife Refuge in Alaska to oil exploration.

But Mr. Gore's book "Earth in the Balance" makes it clear he would rather obsess over the environment instead of saving consumers. And the Gore-Clinton campaign mantra against tax cuts blocks a pro-growth response to the oil shock tax increase.

The 80 million-strong Investor Class, however, will be very unhappy if bad economic policies deepen the stock market correction. So will other countless millions of consumers and small business people. Before this year is out, the prosperity may look less prosperous. Oil shocks and presidential elections are an inflammatory mix.

Lawrence Kudlow is chief economist of CNBC.com and Schroder & Co. Inc.

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