Kudlow - "Drill, drill, drill, so that the futures traders will flee."

Larry Kudlow, the financial whiz, was on the Joe Scarborough show on MSNBC today.  He repeated his unending mantra of "drill, drill, drill," as a way out of the current wilderness of high priced crude.

His insistence on this simplistic solution to the short term price situation has never made a lot of sense to me.  Kudlow is a smart man.  He gets around enough in the right circles to know that short term traders in oil futures are the fire behind the crude prices we see now.

When pressed by one of the hosts on the show to explain how favorable congressional action on drilling both on and off shore would affect the price in less than several years, he "came clean."

"Ah," he said (roughly).  "Approval of drilling will frighten the futures traders out of the market and the price will go a long way down."  "They are already leaving the oil futures market" he went on.  "This will push them out even faster."

Need I say more?  pl

http://en.wikipedia.org/wiki/Larry_Kudlow

Comments

[drauz]

"Kudlow is a smart man."
Perhaps, but he is also an unabashed wanna-be manipulator of market opinion & behavior... Why would futures traders flee if the true impact of drilling is both negligable & far into the future (18 mos or so, by market standards)?

I think he simply hopes for a short-term downdraft in crude prices... say, till around early November.

[linda]

you 'drill, drill, drill' so you can be 'sell, sell, sell' to furriners -- who probably speak french...:

ANALYSIS-US oil firms seek drilling access, but exports soar
Thu Jul 3, 2008 8:04pm BST
http://uk.reuters.com/article/oilRpt/idUKN0325640920080703

By Tom Doggett

WASHINGTON, July 3 (Reuters) - While the U.S. oil industry wants access to more federal lands to help reduce reliance on foreign suppliers, American-based companies are shipping record amounts of gasoline and diesel fuel to other countries.

A record 1.6 million barrels a day in U.S. refined petroleum products were exported during the first four months of this year, up 33 percent from 1.2 million barrels a day over the same period in 2007. Shipments this February topped 1.8 million barrels a day for the first time during any month, according to final numbers from the Energy Department.

The surge in exports appears to contradict the pleas from the U.S. oil industry and the Bush administration for Congress to open more offshore waters and Alaska's Arctic National Wildlife Refuge to drilling.

[fnord]

Meanwhile, here in Norway todays headlines was "Oil below 100 within a month"... Two points to you, colonel.

[ISL]

This is a particularly lame explanation, and outside the media echo box shouldn't even exist.

When Brazil "found" the massive deep oil water find of a possible 33 billion bbl (proposed third largest in world) back in April 2008, had no effect on scaring futures traders. There is no question, either about permission to drill.

[Clifford Kiracofe]

1. "Federal lands hold an estimated 650.9 trillion cubic feet of recoverable natural gas, enough to meet the natural gas heating needs of 60 million households for 160 years (approximately 60 million households in the United States are heated by natural gas).

Federal lands also hold an estimated 116.4 billion barrels of recoverable oil, enough to produce gasoline for 65 million cars and fuel oil for 3.2 million households for 60 years."
http://www.api.org/policy/exploration/expanded-access.cfm

2. Anent Access Restrictions, graphic at: http://www.api.org/policy/exploration/upload/Watson_Access_Restrictions_map.ppt

3. Anent Natural Gas/US note data at:
http://www.npc.org/

4. Anent Coal:
http://www.nma.org/statistics/pub_facts_coal.asp

5. Future for US, see section "Energy Ooutlook" at:
http://www.npc.org/

6. Here are some photos of Bloemenveiling Aalsmeer, largest commercial flower auction center in Europe...plenty of tulips there.
http://images.google.com/images?hl=en&q=Bloemenveiling+Aalsmeer&btnG=Search+Images&gbv=2

[Matthew]

Col: Robert Bryce in his book the "Gusher of Lies" remarks that energy independence is not only unattainable, it is bad policy. Kudlow, Friedman, Woolsey, et. al. just have to realize the oil-producing countries are going to be richer and we have will have less leverage against them. To which I say, so what? The last decade has been one of "opportunity" without a counterforce. Isn't that the exception historically?

[Patrick Lang]

ISL

Professor, I would be more impressed if you did not clearly "have a dog in this fight."

Mongoose

Do you and ISL work together? Your e-mail address indicates another professor or graduate student.

All

I suppose I will get e-mail from dogs who want anonymity on the internet. (New Yorker cartoon reference) pl

[Mongoose]

Kudlow smart? That remark is hard to swallow Colonel given the thin reed of evidence on which to base such a conclusion. Kudlow is smart in one way only: he makes every proposed solution sound so simple, kinda like Bob Novak when he was not just a crotchety ole ideologue but an entertaining crotchety ole ideologue. For Novak, tax cuts were the cure for everything from scrofula to abortions. I'm sure Kudlow "knows" that drilling for offshore oil is key to reducing obesity in the U.S. See how simple some problems are to solve?

[Patrick Lang]

Matthews

Sounds like moralizing is driving your thinking. I prefer 60 dollar oil. pl

[Richard Whitman]

The trouble with Kudlow and his followers is that they have an almost mystical belief in "free, unregulated markets". The last three recessions were brought to us by free, unregulated markets with a heavy dose of criminality thrown in. No wonder the Fed and the Treasury are calling for more financial regulation.

[Mongoose]

Colonel:

Sorry, but I don't know ISL. I'm a history professor at a small regional university in the southwest. I prefer to remain "anonymous" on the off chance that I will embarrass myself by unwittingly revealing my own level of ignorance and/or stupidity. In other words, if I get called out as an ignoramus only I will know that it's me.

[Alex]

Kudrow now thinks the possibility of a little more oil for a while in the indeterminate future will spook the market down. Back in 2002, he thought destroying Iraq's export pipelines would send the stock market way up and the effect on the oil price wouldn't be a problem. He also wanted to simultaneously invade Iraq and Pakistan using only SOCOM!

[Patrick Lang]

All

As you know the PPB dropped momentarily to under $120 this morning.

The dummies on the finanacial cable channels are unhappy because they can't explain the fall in crude prices from 147. Until it fell, they were all looking for a virtually infinite run up. wonderfully, they are now trying to rationalize their analytic failure with the usual easter egg hunt for shreds of "evidence."

It is unfair to expect them to analyse. My bad. They are actually the equivalent of sports reporters. pl

100/bbl in a month, 60/bbl later on. pl

[Jose]

Just another Jacobin pushing their agenda:

http://blogs.wsj.com/politicalperceptions/2008/08/03/can-4-gasoline-drive-mccain-campaign/

Anybody know if the negotiations with Iran had any impact on the price drop?

Here another article that claims how to really lower the price of oil, much to the Jacobin's amusement:

http://www.huffingtonpost.com/robert-naiman/want-lower-gas-prices-lif_b_116341.html

[zanzibar]

There seems to be a few more blow-ups coming in the hedgie world as there were a few who were long oil/short financials as a leveraged trade.

The double whammy of the short squeeze in financials and the oil shorts taking the short-term bacon is causing an unwind of this pair trade as the margin calls come in. The mo-mo quants once again getting burned!

[ISL]

Dear Colonel,

Really wish I had a dog in the fight (or an investment - or rather any investment other than a depreciating house.

Actually, I agree with you that in the short term chasing the speculators out of the market will drop oil prices. However, my point is that the speculators are not chased by news of potential oil reserves a decade or more in the future (lets lease lease lease), but rather firstly changes in demand and secondly interruptions (hurricanes, geopolitical) and cessation of those eruptions.

[alnval]

Col. Lang:

Larry Kudlow? This may be one of the few times when an ad hominum argument may make some sense.

Unlike Arthur Schlesinger who, when asked why he never got his doctorate is supposed to have replied, "There was no one to examine me," Kudlow doesn't have the same excuse. He just didn’t finish.

A man with an uneven, marginally productive if not unstable intellectual history and 13 years into a period of ostensible rehabilitation from a publicly acknowledged and professionally devastating polysubstance addiction, his intellectual bearings appear to have stabilized sufficiently to continue to qualify him as an intellectual hack who is willing to attach himself like a limpet to whatever economic position has popular currency and personal financial reward.

Like the monkeys in the British Museum it is inevitable that Kudlow might eventually say something worthwhile but the amount of due diligence required to confirm it would quickly make its value outdated and worthless.

Unless you were engaging in an enormous irony alert, or, I totally misunderstood the purpose of your post (which is very possible), I find it hard to believe that you would either define Kudlow as a “smart man” or use his thinking to support your own.

[b]

Looking at this chart, the uptrend is not broken.

Trader's technical marks are short term linear breaks of French Curve breaks, which both would be around $100+/bl. Unless those are broken, a fundamental change can not be assumed.

A fifty percent retraction is not uncommon in commodity markets and is often the precursor of a violent rise. Oil went from $75 to $50 only to jump to nearly $150.

So who knows? Do NOT EVER make plans based on such models or technicals.

[SAC Brat]

Working in the airline industry "100/bbl in a month, 60/bbl later on. pl" is a big deal. Above 80/bbl the economic equation of flying planes versus selling tickets gets unstable because an increase in ticket costs leads to less tickets sold. 60/bbl means a really happy airline industry which will likely find the scratch for new planes.

[Patrick Lang]

All

I keep trying to persuade you all that you have to consider information separate from its source. pl

[Curious]

Uncle Saudi come to the rescue.

(Boy if this isn't a sign the planet is controlled by few people, I don't know what else.)

[Jonathan House]

For me the key post in these oil threads was that of Shephard who wrote:

What I'm missing in this discussion is a "how." Everyone seems to be assuming that the market is being manipulated, and speculators are making a killing, but what I'd like to know is the mechanism by which they're doing it. I can explain to you how mortgage securities were manipulated, I can explain how Lehman's stock has come under pressure, I can explain how Enron drove up the price of electricity in California. What I don't understand is how speculators are influencing the price of oil through futures markets. Perhaps there is a way this can be done, but I don't know what it is.
Posted by:shepherd | 25 July 2008 at 08:18 AM

Here are some old posts in which I too question the role of speculation and the futures market AND some predictions about price that were made.

Pat Lang on 19 July
… The short term problem is not the same. This is and has been a bubble generated in the ways that have been discussed in previous articles. Short term investment in the futures and spot markets have driven prices to levels unrelated to present supply and demand. The markets have recently been a fantasy world without real limits for movement on the up side.

The bells are now tolling for that fantasy. The smart people who stand to lose from this festival of childish greed have been kicking the psychological props out from under the process of finding bigger and bigger fools.

You don't think so? Good. It will be amusing to see how much money is lost in your disillusionment.
Sometime in the next few months the price per barrel will fall below 100/barrel. It will be interesting to see how far it falls below that level... pl

Dear Pat,
It seems to me that your intuition is that the recent decline in the price of crude from about 145 to about 125 suggests something about the questions of "bubble" and/or "speculation" and/or the question of whether, how, and by how much the futures market affects the spot market or vice versa.

I am not sure what you are saying about any one of these "issues". So I don't know how what evidence would count as tending to disconfirm your intuition.

For instance, if the spot price spends the next 6 month largely between $110 and $130 would that change your view in any way?

Posted by:Jonathan House | 19 July 2008 at 11:43 AM

[Pat replying to a challenge to make a prediction]
OK. I think we will see $80/barrel sometime before 1 January, 2008. pl
Posted by:Patrick Lang | 23 July 2008 at 12:07 AM

[rc thweatt]

Source: Former offshore oil "boat trash".

Information: The estimates of seven years before any oil is produced from new offshore fields is very likely accurate, and may be optimistic. It would take 3-5 years assuming adequate resources, which don't exist. If the Federal ban were lifted, and Florida decided to risk her beaches(actually, not much of a risk), nothing much would happen for years- there are not enough offshore drilling rigs and ships, pipe-lay barges, boats, or people. Fifteen years of cheap oil have seen to that. The traders know this perfectly well- they can google 'offshore oil rig utilization rate' just like I did and note it's well over 90% world wide.

I consider that the perception that an attack on Iran is less likely is far more potent- remember the spike after that Israeli exercise?

[Patrick Lang]

Jonathan House

OK. "Giving me the high hat..." as the man says in Miller's Crossing.

If I am right are you going to say so? pl

[Patrick Lang]

b

Surely you are not one of those people who think that trends will necessarily continue.

If by "technical" you mean the chartist shamans, that has nothing to do with me.

My whole point has been that the markets are exercises in mass psychology. That has nothing to do with drawing imaginary models on graph paper. pl