Sunday, January 8, 2017

The Commerce Clause and Rising Oil Prices

Article I - The Legislative Branch
Section 8
Clause 3:

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;
“The authority to regulate commerce includes the right to control nearly all areas of the national economy.”
Chief Justice John Marshall 1824

The Commerce Clause was never clearly defined until 1824 when the Supreme Court heard the case of Gibbons v. Ogden. The case was the result of exclusive rights to the steamboat industry in the state of New York. The court ruled that the federal government, not the states had the power to regulate commerce across state lines. This case and the majority opinion was the birth of bureaucratic government regulatory agencies.

The 115th Congress was sworn in on January 3rd with the goal of repealing Obamacare, rolling back regulations on businesses and capital markets, and restoring law and order. The Commerce Clause, at its best, is a reactionary tool used to protect citizens from the criminal intent of those in the business of increasing the profits of large corporations and financial institutions. In theory, once a particular form of graft has been detected, congress would investigate the inner workings of said criminal activity and produce laws preventing others from being injured by such behavior in the future. None of this is likely to happen under the Republican leadership.

A decade after signs of the impending crash of the real-estate backed securities bubble started emerging, the GOP leadership has promised to eliminate many of the regulations put in place by the Obama administration. Based on the last 6 weeks of activity in capital markets, Wall Street is feeling pretty good about their prospects for 2017. We’re likely to continue seeing value added to capital markets throughout the calendar year, but what kind of long-term pain are the American people in for once the band stops playing?

I’m certain oil prices are going back to 2008-2009 levels in the next 18 months to two years. I offer two points to support this claim: 1. Donald Trump’s pro-Russian sensitivities combined with the fact his cabinet is filled with plethora of pro oil climate change deniers make it likely he will use executive orders to lighten regulations on the oil industry. 2. We have a Republican congress that can roll back regulations on financial market speculations. I think we are going to see synthetic CDO’s based on oil futures drive oil prices up. The price of a barrel of oil closed at $53.99 on 1/6/17 that’s almost twice as high as the low mark in 2016. In fact, 2016 was the cheapest year at the pumps since 2004.

Cheap oil prices are hurting Russia and Iran, (as well as Saudi Arabia, Venezuela, and Nigeria) but Russia is better situated to benefit from a Trump administration. Russia is likely to get sanction relief while Iran is likely to face more sanctions. Both nations would benefit from higher oil prices, but for the Russian economy to get relief oil only has to reach $100.00 dollars a barrel; Iran needs oil to get to $130.00 a barrel to put their annual budgets back in line. I believe the Trump administration will use more sanctions and tough talk against Iran to distract the media from their efforts to help the Russian economy. I also believe the media will continue doing a poor job of covering the stories that have an impact on the lives of most Americans. While the right hand is working with the Russian government the media will be busy covering the left hand tweeting.

We will have a Presidential cabinet in place that has largely avoided the kind of congressional scrutiny we’ve seen in the past. According to Joy Reid’s reporting, “many of the key appointees haven’t filled out ethics and financial disclosure forms for proper vetting to take place.” Jeff Sessions is a great example of a useful distraction; while his confirmation hearing is likely to be the one most covered by the media, his agenda for the Justice department could be easily fulfilled by a number of less known and controversial white supremacists. In other words, what we know about him and his racism will ultimately be less damaging to the long-term financial health of our nation than what we don’t know about the economic interest of Donald Trump and many of those around him.

Anyone with oil holdings in their portfolio will see a real boom before the next bust. We’ve been down this road before. Over the next few years we could very well see a continuation of the Obama recovery. The Federal Reserve will incrementally raise interest rates, but the cheap money policies that fueled the recovery will be replaced with pro-business deregulatory policies that offer favorable returns to those at the top of the economic ladder while providing little, if any, relief to those of us who will be paying for the impending tax cuts and the border wall with Mexico. The 115th Congress will use their ability to create or destroy regulations to shape the next decade. Based on the Republicans historical record that should give all of us pause, but then shake us into action. Instead of ruminating on 2016, maybe it’s time to come up with plausible strategies for our fight in 2017? 

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