November 20, 2012

Oil Price and U.S. Presidential Elections

By Kurt Cobb 

Was the most recent American election outcome determined by the presidential debates, changing demographics, voter views on issues, Hurricane Sandy (and the president's reaction to it) or voter turnout? Probably all of these contributed to the result. Energy was actually one of the issues discussed during the campaign, particularly domestic production of oil and natural gas. But, it's not the debate over energy issues that interests me here so much as the price and supply of oil and their effects on voter attitudes.

Let's go back to the summer of 2008. The price of oil had been climbing all year reaching its highest level ever (even adjusted for inflation) at $147.27 a barrel on July 11. From there the price began to decline. Though few people knew it, an economy beleaguered by years of rising oil prices was already in recession. The financial markets eventually crashed that fall. And, the worst slump in the world economy since the Great Depression followed.

The bursting of the U.S. real estate bubble in the previous year was frequently cited as the cause of the crash. And, there is little doubt that stresses in the financial industry combined with the real estate collapse to create a financial meltdown. But, the work of economist James Hamilton suggests that high oil prices were also a significant factor in precipitating the bust and therefore the economic pain felt by American voters. All of this implies that the solid victory of Democrats and Barack Obama in 2008 resulted at least in part from discontent among voters over high oil prices. The conclusion seemed obvious even then.

After dipping into the $30 range in late 2008, oil prices rebounded to around $80 by the beginning of 2010 and remained in the $70 to $80 range through election day that year. If we accept Hamilton's work, then high oil prices produced a significant drag on the economy and may have caused swing voters, frustrated by a slow economic recovery and high unemployment, to hand the party out of power a huge victory. They gave Republicans control of the U.S. House and of many additional governorships and state legislatures.

Fast forward to 2012. Oil prices spent much of the year between $90 and $110 a barrel. As high oil prices continued to put a drag on the still slow economic recovery, the year seemed designed to give Republicans a decisive victory--but only if voters perceived that the Republican Party was still the party out of power. In fact, the flamboyance of the Republican-dominated U.S. House and its defiance of the president combined with the swift passage of the Republican agenda in a large number of states may have made the Republican Party seem to many voters like the party in power--put there to solve the problems not adequately addressed by Democratic politicians which voters had only just installed during the 2008 elections.

As I indicated, there are certainly other factors besides oil prices that determined this year's election outcome. But I can't help thinking that many voters--still frustrated by slow growth due in part to high oil prices--decided that Republican politicians had not acted to address their economic anxieties. So, those voters simply went the opposite direction and voted for Democrats.

If the pattern I see holds, then continuing high oil prices would lead to a resurgence of the Republican Party in the 2014 elections. Naturally, if prices decline and stay down, oil will not be a central issue. But here is the problem. If oil supplies are going to be constrained in the long term, as I believe they will be, then waiting for supply to rise and for prices to fall will not be a useful strategy for either party. Neither will touting the temporary and overhyped gains in domestic oil production that are, in any case, being offset by declines abroad. Keep in mind that oil is a worldwide market, so Americans will continue to pay world prices whether or not domestic production rises.

The party that addresses constraints in worldwide oil supplies by intensifying efforts to reduce U.S. consumption and speeding a transition to alternative energy would probably likely break the cycle of rapid swings from one party to the other every two years--but not in the way that that party would like. Broaching the subject of limits with voters and acting to address those limits could spell political suicide for the party that does it. Surely, during the next election the opposition party would say that we have plenty of oil and offer a vague plan, however preposterous, to overcome production constraints.

It is true that Democrats have emphasized renewable energy and conservation more than Republicans. And yet, President Obama has repeatedly asserted that he is working to increase permitting of oil and natural gas exploration on federal land as quickly as possible. That's hardly the equivalent of grasping the nettle and giving the voters the bad news, namely, that world oil production has been stagnant since 2005 and that there is little prospect that world production--which is what determines the oil price--will grow much from here.

It's possible that the myth of oil abundance and the powerful oil industry lobby behind it has locked us into a politics which will provide neither party with the decisive majority needed to enact the difficult agenda that would move us toward a more sustainable energy economy. But then, that's the way the oil industry must like it--high prices with promises that eventually, someday, perhaps just around the corner, prices will come down. All you have to do is trust us!

About The Author - Kurt Cobb is the author of Prelude, a peak oil-themed novel, and a columnist for the Paris-based science news site Scitizen. His work has been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.  (EconMatters author archive here.) 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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