Monday, March 19, 2012

Energy prices, the economy and the election

Business Times - 20 Mar 2012

Energy prices, the economy and the election

Unfortunately for Obama, rising oil prices will cost votes whatever he does


WHEN one considers the Federal Reserve's recent outlook, the rise in retail prices, the creation of more new jobs, and the relatively bullish stock market, it is possible for your average American voter to conclude that the US economy is showing some new signs of momentum - or is expanding 'moderately', as the Fed put it. And that could play into the political hands of President Barack Obama.

But former Massachusetts Governor and the leading Republican presidential candidates believe that they have discovered a political-mathematical formula of sorts to help them beat the president in November: The more gas prices go up, the more President Obama's poll numbers go down.

Even President Obama seems to get it. 'As long as gas prices are going up, people are going to feel like I'm not doing enough,' he said last week. 'And I understand that, because people get hurt when they're going to that gas station and seeing those prices rise every day,' he added.

Indeed, the most recent New York Times/CBS news poll indicated that President Obama's approval rating is now at 41 per cent, a drop of nine points in just one month. And guess what has been the most significant economic development that took place in that month? Fuel costs have been getting higher - gasoline went up 30 US cents a gallon in the past month - and have been impacting those blue-collar workers and low-income households in key 'swing' electoral states who have yet to recover from the financial devastation of the Great Recession.

You don't have to be an economist or a political expert to figure out that there is a relationship between energy prices and the president's approval rating. Hundreds of millions of Americans - most of them own cars and rely on them to commute to work and everyday transportation - think that presidents can do a lot to control oil prices. The New York Times/CBS News poll concluded that 54 per cent of Americans share that belief. Only 36 per cent of them believe that what they pay at the pump is beyond a president's control.

Most experts tend to agree with those 36 per cent of Americans and point to economic and political factors that are beyond the control of any White House occupant in an age of global energy markets. In particular, changes in demand and supply of commodities explain the jump in oil prices. The conventional view is that about 75 per cent of the price of petrol at the pump reflects the global price of oil. And the fact is that consumption (demand) of oil in emerging markets and the industrial economies has been rising; while there have not been new major sources of supply.

At the same time, the continuing political instability in the oil-producing region of the Middle East (including the prospect for a war with Iran), financial speculation (or 'oil speculation') and seasonal factors have combined to push oil prices to new highs. But President Obama's Republican rivals are exploiting public fears about rising petrol prices and insist that the a lack of domestic drilling and various regulations on energy companies, driven supposedly by the White House's environmental agenda are the main culprit. If only President Obama would have allowed the oil companies to open new domestic energy reserves, the prices Americans are paying at the pump would go down, way down, argue GOP leaders. 'Drill, Baby! Drill!' is one their favourite campaign slogans.

In fact, the policy pursued by the Obama Administration and its Democratic and Republican predecessors - maintaining low taxes on gas - is the main reason why Americans use more gas than consumers in other industrialised nations. And assuming that Washington agreed to expand domestic drilling, the immediate impact on gas prices would be negligible.

Ironically, the kind of foreign policy agenda being promoted by the Republicans, including their calls for escalating the military tensions with Iran, has been responsible in part for the rising in global energy prices. A full-blown US war with Iran would probably raise those prices to the stratosphere.

If the costs of the interventionist military policy that Romney and the other Republicans want to pursue in the Middle East are factored into the prices that Americans pay for petrol at the pump, it is possible to conclude that consumers end up with a higher financial burden. Not to mention the fact that extracting and burning more gasoline - the favourite Republican policy prescription - create costly 'externalities' in the form of environmental cleanup and health costs for American consumers.

Yet former House Speaker Newt Gingrich, another Republican presidential candidate, has been blaming President Obama for the high oil prices and pledges to reduce the price of a gallon of petrol to US$2.50 from the current US$4 through some undefined energy policy; and that despite the fact that going to war with Iran - an approach that Mr Gingrich advocates - would raise it to US$6. Indeed, a study issued by the Council on Foreign Relations last month suggested that a war with Iran could under certain circumstances triple the price of a barrel of oil.

President Obama could use the US strategic petroleum reserve and put some of it on the market and pressure Saudi Arabia to put a downward pressure on oil prices. But the impact of such moves would be temporary and small and may have only limited impact on voters' attitudes.

Unfortunately for President Obama, presidential election campaigns do not take the form of a serious economic symposium and voters are not expected to pay attention to the evidence that White House's policies are not responsible for the rising price at the pump. And continuing rise in energy prices - with or without a new war in the Middle East - are bound to reduce economic growth and cost the Democratic president even more votes in November.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

No comments: