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September 22, 2000
Interesting week.
The financial markets reacted to rising energy prices, a spreading slowdown in the economy, and the election in surprising ways.
On the surface, the shortage of energy supplies threatens to produce a another spike in prices from already-high levels. Domestic inventories of petroleum distillates (including heating oil and diesel) held 146 million barrels a year ago, and today hold only 116 million barrels.
The supply of natural gas -- the leading substitute for oil at utilities, and the sole supply of home heat for most of the nation -- is just as short. Gas inventories are 15% below last year's, and prices have doubled since January.
However, the markets have shrugged off the whole episode as a transient affair. The spike in prices at the end of last winter faded quickly, and refiners were reluctant to load up on oil last spring and summer, when it appeared prices would fall further. Now there is a mad scramble, and it will take OPEC's increased production a while to fill the pipeline.
An energy market problem usually wrecks transportation stocks, but these were okay; the lousy, sometimes panicky week for stocks reflected technology weakness.
Intel's earnings announcement cost its stockholders roughly $100 billion in ten minutes this morning as the stock fell 22%. If demand for Intel products is soggy, well... it's time to lighten up on a lot of other tech stocks with improbable P/E ratios.
So, on balance, the inflation threat from energy prices has been overwhelmed by counter-inflation stock market weakness and economic slowdown -- a prescription for lower interest rates when the energy problem washes through.
Then, the election: two, maybe three effects.
It has dawned on Treasury traders that the platforms of both candidates will lead to smaller budget surpluses in the future. Diminished scarcity value caused an abrupt .25% rise in yields on long Treasurys while corporate, mortgage, and municipal bond rates stayed unchanged.
Second: the candidates' struggles with energy policy.
Mr. Gore could not bear the temptation to appeal to consumer anger and needle his oil-industry-veteran opponent. Mr. Gore's call for a series of five-million barrel draw-downs from the Strategic Petroleum Reserve reversed his long-standing (laudable) support for higher energy taxes, and came later the same day that Treasury Secretary Summers and Chairman Greenspan stated the SPR should be left alone.
Mr. Bush countered with his plan: force OPEC to pump more oil.
Take your pick: hypocrisy or idiocy. The markets may be growing a teensy bit nervous about the choice.
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