In a strange twist, it may well be that the speech about gasoline prices given this week by president Obama may be the beginning of the end of his presidency. Obama has opted for the course on energy that is most likely to lead to his defeat. This may not seem obvious, but here are the reasons why:
1) The American economy can be very responsive to fuel prices. As gasoline prices move up and down there is some change in the amoung of funds that consumers have for spending on other items and this can speed or slow the rate of economic growth. The effect is not a major one, however, until gasoline prices hit unusual highs. At a certain point, ordinary consumers see the extremely high cost of filling up their cars and they take notice. Not only do consumers try to conserve gasoline due to the higher prices, but they also cut back on other purchases. Vacations and other trips are the first things to fall, but all sorts of other items get caught up in the mix as well. Everything from TV's to shoes feels the effect of this new and increased concern of consumers. Every time that gasoline prices have soared, the economy has tanked. Remember, just before the great recession in 2008, oil prices hit their all time record high.
2) In his speech, Obama made clear that he does not buy into the idea of increasing drilling as a means to lowering prices. Indeed, his focus was on putting the blame for high prices elsewhere; it is Iranian disturbances or something else that has led to high oil prices, he tells us. Obama even mocked the GOP for its supposed three part plan to lower oil prices, "1)drill, 2)drill, and 3)drill." Obama also promoted green energy once again, this time fuel from algae.
3) None of the ideas that Obama mentioned in his speech will have any effect on the world price of oil. The response of the oil markets to the Obama speech was a yawn; prices continued to wiggle upwards a bit. so the trend continues, and it foretells of much higher prices to come. Every year, there is an upward trend in gasoline prices during the months of March to May with the peak around Memorial Day. This is a byproduct of a)the decline in supplies as refineries switch over to their summer mix and b)the normal increase in driving that takes place when the weather gets better in the spring. On top of this, the Iranian situation is likely to get worse; indeed, the mullahs may decide to close the Strait of Hormuz which would easily double the world price for oil overnight. No large new supplies are coming on line either. All of this points towards an increase in speculation as well, so the most likely course is that oil prices will keep going up.
3) If gasoline prices continue to soar through the end of May, the American economy will head south. All the recent good news which shows that the economy may actually be turning the corner towards some reasonable growth rate will be replaced by slowing growth or even a recession. Unemployment will stop falling and start rising again. Since these are all lagging indicators, a high gasoline price in May will mean higher unemployment in July, August and maybe September. If the gasoline prices stay high into June and July, the bad economic news will continue through election day.
4) Despite all the garbage that gets tossed out with regard to the upcoming election, the one undeniable fact is that Obama will not get re-elected if the economy is clearly going in the wrong direction. After four years in office, Obama has to at least have movement in the right direction or he is history. Few voters will care whether or not the cause of high oil prices was due to Obama or not, so the Obama campaign slogan ("It wasn't me") will not carry the day.
There are, of course, things that Obama can do to change the trajectory of world oil prices. Obama could release more oil from the strategic petroleum reserve to drive down prices. That is a temporary move, however, and it would be unlikely to provide enough of a solution without a release of enormous amount of oil, something that would be perceived as a purely political move. Obama could also open up all sorts of new areas to drilling and hope that the prospect of more oil would drive down prices. but these moves have to come quickly. If Obama waits until May when gasoline prices are peaking, the damage to the economy will already be baked in the cake.
I just do not see Obama changing course in time. A week after mocking the idea of "drill, drill, drill", even Obama will not just adopt it as his plan. Indeed, with Robert Gibbs out there telling the lie that the USA has only 2% of the world's oil, the Obama campaign is going all out the other way. It may be their biggest mistake of the campaign.
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