Are gas prices going to sink Obama—and can anything be done about them?
Oil is up around $110 per barrel; the price of gas at the pump is approaching $4 per gallon. It’s clear the White House is nervous about this: Barack Obama has started mentioning gas prices everywhere he goes. There are two big questions here: Are rising gas prices going to sink Obama’s presidency? And, either way, is there anything that can actually be done about them?
High gas prices are unquestionably a pain for many Americans. Thanks to our highway-centric infrastructure, most people can’t really avoid driving, even when gas prices spike; right now, for instance, they’re hovering near $4 per gallon. But it’s less clear that voters will end up taking it out on Obama. The old c.w. was that high gas prices chipped away at a president’s poll numbers. George W. Bush’s approval ratings seemed to fluctuate in perfect concert with pump prices. More recently, though, political scientists have peeled these numbers apart and found that the correlation is mostly a statistical mirage. At best, high gas prices have an indirect effect: They make voters think inflation is worse than it actually is.
The one exception, of course, is if the high price of oil plunges the U.S. economy into another recession. In 2009, James Hamilton, an oil expert at University of California, San Diego, found that sky-high oil prices in 2007 and 2008—remember those days of $150/barrel oil?—were a main driver of the U.S. economic collapse. But, when I asked Hamilton if there was a possibility of this happening again soon, he seemed more sanguine. “Right now, it’s not enough to put us in another recession,” he said. Here’s a big reason why: Back in 2007, consumers were on an SUV-buying spree, and, when high gas prices hit, Americans ran away from their once-beloved fuel-guzzlers, which crippled GM, Ford, and Chrysler, dragging the rest of the economy down with them. But, as Hamilton noted, “Detroit’s not as vulnerable this time around.” People aren’t buying SUVs at the rate they used to, and auto sales overall are relatively weak.
Still, while the current oil spike isn’t crippling, it still hurts. If consumers are spending more at the pump, they have less to spend on other stuff, and that weighs on the economy. So what can actually be done? Unfortunately, there are few good options here.
End the war in Libya. Many analysts think that the Libya conflict is behind much of the oil price spike. After all, though Libya has only 2 percent of the world’s oil—albeit a relatively rare low-sulfur type—it’s so hard to get people to stop using oil that a slight drop in supply usually translates into a big jump in price. At this point, it’s clear that Saudi Arabia can’t make up that extra supply. So, unless anyone has any ideas for ending the Libya conflict tomorrow, this will continue to be a problem.
Crack down on speculation. This is the White House’s preferred approach; the Justice Department just created a task force to investigate whether oil traders are somehow illegally manipulating the market and driving prices up. Trouble is, even analysts who are in favor of cracking down on Wall Street machinations don’t think this will work. “Yes, the price of energy seems to be driven by excessive speculation,” says Tyson Slocum of Public Citizen, pointing to a recent Goldman Sachs report suggesting that the price of oil was likely overpriced by about $20/barrel. “But,” Slocum adds,” most of that excessive speculation is perfectly legal.” If traders believe that oil will continue to be scarce in the future, then oil futures will go up. That’s perfectly legal hedging, and there’s nothing the Justice Department can do about it. There is, Slocum pointed out, one exception. At times, a few traders can buy up huge swaths of a futures market and manipulate the price. In theory, the Dodd-Frank financial reform bill that Congress passed last year was supposed to prevent this: The Commodity Futures Trading Commission is authorized to set “position limits,” which would prevent any one trader from cornering a market (say, buying up 40 or 50 percent of the market). But the CFTC is still figuring out what it wants to do. “If you actually want to rein in speculation, you need to enforce the existing law, not start a task force,” says Slocum. That said, there’s hardly any guarantee that this would bring prices down.
Bust the EPA. Republicans have occasionally blamed high gas prices on the Environmental Protection Agency’s climate-change regulations. But this is nonsense. The EPA’s rules deal with pollution from smokestacks and other electricity sources. They have nothing to do with the price of oil.
Raise interest rates. Some economists have noted that, when the dollar is weak, oil gets more expensive. Likewise, when interest rates are low, investors shift into commodities like oil, driving the price up. So, in theory, if the Fed raised interest rates, the price of oil might fall. On the other hand, most experts agree that this is a relatively small part of the recent price bump. Plus, higher interest rates would slow the recovery. Basically, we’d be curing one economic ailment by creating another.
Drill, baby, drill! An old standby, often repeated by Republicans. But studies have found that there’s just not enough new oil up in Alaska or offshore to make a huge dent in gas prices. And, in any case, new drilling projects would take years to get underway.
Repeal tax breaks for Big Oil. This, in itself, wouldn’t do anything to change the price of oil one way or the other. Economist Alan Krueger has found that scrapping tax breaks would probably decrease U.S. production of oil and gas by less than 0.5 percent—and, since U.S. oil production is a relatively small part of the global market, prices wouldn’t change much. This would, however, allow Congress to raise money to spend on alternative energy sources (if it chose to do so).
Institute a gas tax. Very few politicians are actually calling for this. But plenty of pundits are. A gas tax certainly wouldn’t bring prices down; it would do the opposite. But recent research from the International Monetary Foundation suggested that even a hefty gas tax wouldn’t do much to change people’s driving behavior or oil consumption. For that, we’d need sweeping infrastructure changes (more mass transit, say) and readily available alternatives (new biofuels or electric cars, perhaps). Again, though, a gas tax could help raise funds for those alternatives.
Get at those tar sands. Right now, the price for oil from tar sands in North Dakota and Canada is lower than the price of imported oil. But there’s a problem: There’s currently no way to get that oil to gasoline refineries on the Gulf Coast. This, notes James Hamilton, is probably the one realistic idea that could reduce gas prices in the near future. After all, unlike new offshore drilling, a pipeline could (in theory) get approved and built in fairly short order. The trouble, though, is that tar sands are filthy, and relying more heavily on this type of oil would mean spewing even more carbon-dioxide into the air—and worsening global warming. (Currently, environmentalists are battling hard to prevent a pipeline from being built.) What’s more, if this was all the United States did, we’d just be furthering our addiction to oil. Eventually, we’ll find ourselves in this same pinch again.
In theory, it’s possible to imagine some sort of sweeping compromise where Democrats agree to a tar-sands pipeline (and maybe some drilling) as a short-term fix and Republicans agree to repeal oil tax breaks and put more money into ways to reduce our dependence on oil—better fuel-efficiency, faster electric-car deployment, mass-transit, the works—so that gas prices become less, not more of a problem over time. But does anyone think that will actually happen?
If this week was any indication, the answer is probably not. On Monday, House Speaker John Boehner conceded that maybe it was time to rescind a few of the many tax breaks that oil companies have long enjoyed. “It’s certainly something we should be looking at,” he told ABC News. Right away, however, Democrats pounced on Boehner’s comments; Chuck Schumer lavished theatrical praise on the speaker’s apparent change of heart as “almost too good to be true.” The response ensured that Republicans would bristle and backpedal, and Boehner’s harried aides spent the rest of the day walking his comments back. Indeed, it certainly doesn’t sound like any sort of grand bargain is in the works.