“Will Gasoline Prices Derail President Obama’s Re-election?”

Sydney M. Williams

Thought of the Day

“Will Gasoline Prices Derail President Obama’s Re-election?”

February 28, 2012

A 95% increase in gasoline at the pump since Inauguration Day won’t help. But it alone will not derail Mr. Obama’s re-election chances. While there has been a lot of talk recently about gas prices, the latest AP-GfK Roper poll indicates that the level of concern regarding gasoline prices, while high, is exactly where it was a year ago

Nevertheless, it is an issue that has the President’s attention, and one which he and his campaign staff decided to jump in front of before Republicans picked up the cudgel. Mr. Obama addressed the issue at the University of Miami last Thursday. Curiously, when talking of the need to drill and look at alternatives, he, without attribution, borrowed a line from his nemesis, George W. Bush: “We need a sustained all-of-the-above strategy.” He mocked Republicans, impugning they were gleeful about higher gasoline prices – “You pay more; they’re licking their chops.” In his speech, he took credit for increased production from shale formations on private and state-owned lands, despite the fact that neither he nor his policies played a role in the development of that acreage. There was no mention of the aborted Keystone-XL pipeline, or of the cancellation of leases on federal lands in Utah and off the coast of Virginia. Nor did he mention the suspension of leases in Montana, the delays in Colorado, or the “slow-walking of approvals in the Gulf of Mexico.

Over the past forty years, Americans have become inured to oil “shocks”. Since Nixon, every President has had to contend with sharp, at times very short, bouts with price changes or product shortages. The October 1973 embargo was the first manifestation that OPEC had a strong hand, and was willing to play it. The catalyst was President Nixon’s decision to re-arm the Israelis during the Yom Kippur War, but it was Mr. Nixon’s decision two years earlier, in August 1971, that set the stage. That was when the U.S. went off the Gold Exchange Standard. The effect was a declining dollar and, since oil is priced in dollars, OPEC members were receiving a depreciated (and depreciating) currency.

The reaction of consumers was shock, as supplies dropped and prices at the pump doubled. Long lines developed at gas stations. The federal government’s response made things worse by regulating the price and allocating the product, restrictions that would not be lifted until late 1980 – early 1981. The people were requested not to put up Christmas trees, for fear of power surges! The embargo finally ended in March 1974, following negotiations led by Secretary of State Henry Kissinger. But prices continued to rise, offsetting inflation that resulted from a depreciating dollar. Republicans lost the White House in 1976, but that had as much to do with the Watergate scandal that forced the resignation of Vice President Spiro Agnew in October 1973 and President Nixon in August 1974.

The second oil crisis in 1979 occurred in the wake of the Iranian revolution, with production curtailed and exports suspended. Once the new regime was in place, production and exports resumed, but at lower volumes. President Carter’s order of cessation for Iranian imports added to the panic. In 1980, following the outbreak of the Iran-Iraq War, oil production in Iran nearly stopped and Iraq’s production was severely cut. Mr. Carter took to wearing sweaters and encouraged people to turn down their thermostats, When Khomeini’s regime took 52 Americans hostage in November 1979 and held them for 444 days it sealed Mr. Carter’s loss to Ronald Reagan.

While there were periodic bouts price increases, oil markets embarked on a twenty-year decline in crude prices. In the early 1990s, there was a short, but dramatic price increase, which did not help President George H.W. Bush, but prices (of both crude and gasoline) in 1999 were lower than they had been in the early 1980s. Prices began rising in the early 2000s, along with other commodities like gold and silver, reflecting expanding deficits and relatively low interest rates. We all remember the summer of 2008 – with credit markets nervous, housing in decline and equity and High Yield bonds in a funk – when the price of crude spurted to $140 a barrel. It was a temporary blip, fueled by speculators and ultimately squelched when the reality of the economic consequences of the credit crisis became glaringly apparent. Nevertheless, it did John McCain’s candidacy little good.

Current increases in crude and gasoline prices do not owe their gains to economic fundamentals. U.S. demand for crude products is running 6% below where it was a year earlier. Europe’s economic heart is barely beating and China appears to be slowing. More likely the current price rises are due to events unfolding in Iran with the fear that the Straits of Hormuz could be closed and also the unrest in Nigeria. Oil is an international product whose price is influenced by geo-political events as well as by economies. And, it is still priced in a depreciating currency – dollars.

Minus external events, oil prices should be weaker. U.S. crude production is up, based on drilling on private and state lands in places like the Bakken in North Dakota. Canada has excess production. Demand is lower, based on conservation, but more importantly on an economy that seems iffy at best. (The Economic Cycle Research Institute – ECRI – indicates that the U.S. economy is slowing, not reviving.) The Citigroup U.S. Economic Surprise Index closed at 58 in February – still positive – but down 34 points since January. Europe is a mess and, as mentioned above, China appears to be slowing.

President Obama, in his Miami speech, said the American people are not stupid. They are not. (We all remember the wisdom of William Buckley when he said he would rather be ruled by the first hundred names in the Boston phone directory than the entire Harvard faculty.) And that is why this issue will be monitored closely by both sides, each looking for an advantage. It is far too early to determine whether high gasoline prices will derail Mr. Obama; it will depend on the economic impact.