Pain at the Pump
Gas prices could hit $5 a gallon this summer—a potential road block to economic recovery and President Obama’s bid for re-election
Liz Carrazco, 20, of Riverside, California, drives about 50 miles a day, mostly to and from her job at a cellphone store. When she fills up the tank of her Honda Civic these days, it costs her about $50.
“It hurts,” she says of the prices. “Everyone needs gas to get around.”
Gas prices are already at record highs for this time of year and approaching $5 a gallon in California. And many economists expect them to go even higher over the summer, as they always do when vacations increase demand for gas.
How high gas prices climb—and whether they leap above $5 a gallon nationwide—could have a big impact on the U.S. economy and this year’s presidential election.
“As a shorthand way to assess how the economy’s doing, everybody notices the price of gas,” says Ethan Harris, an economist at Bank of America Merrill Lynch. “It can have a big symbolic impact, and in a presidential election year, when the price is rising, that can create a big headwind.”
What’s behind the rising prices? The most immediate cause is the ongoing upheaval in the Middle East, particularly tensions with Iran over its suspected nuclear weapons program. Iran is the world’s third-largest oil exporter; tough new international sanctions aimed at preventing Iran from selling its oil are squeezing global supply and causing prices to rise—as is Iran’s threat to close the Strait of Hormuz into the Persian Gulf, through which 20 percent of the world’s oil is shipped.
Then there’s the longer-term issue of rising demand from developing countries. In China and India alone, the demand for oil is expected to double in the next 20 years as their economies continue to grow and their exploding middle classes are able to buy millions more cars.
As recently as 1999, gas cost about $1 a gallon in the U.S. For most of the 20th century, as oil transformed the modern world, it was abundant and easy to find. Cheap oil fueled America’s love affair with the car and the growth of suburbia. But as oil became harder to find domestically, the U.S. became dangerously dependent on imported oil, much of it from unreliable, even hostile, sources— many in the Middle East.
Now Americans are feeling the pinch—and not just at the pump. That’s because energy costs are built into the price of practically everything we buy: When a retailer pays more to get jeans shipped to its stores, it’s likely to try to pass on the additional cost to consumers. And because plastic is made out of petroleum products, the price of everything from soda bottles to iPods can be affected.
One bright spot is that the U.S. has become much more energy-efficient in recent years. Tough economic times and previous price spikes have prompted many Americans to shift to smaller, more-efficient cars. That means today’s high fuel prices shouldn’t hurt as much as they once did, economists say.
But if the standoff over Iran’s nuclear ambitions escalates into military conflict or there is some other major supply disruption, prices could go up even more, analysts say.
“If we get some kind of explosion—like an Israeli attack [on Iran], or some local Iranian revolutionary guard decides to take matters in his own hands and attacks a tanker—then we’d see oil prices push up 20 to 25 percent higher and another 50 cents a gallon at the pump,” says Michael C. Lynch, president of Strategic Energy and Economic Research.
For the typical driver who pumps 60 gallons of regular unleaded gas a month, a 50-cent-a-gallon increase means spending an extra $30 a month. The extra $30 spent on gas is $30 not spent at Walmart or the movies, which could crimp America’s budding economic recovery.
Higher gas prices could also cause political problems for President Obama. He’s being attacked by Republican presidential candidates for not doing more—like increasing domestic oil production— to lower gas prices.
Overall, energy production in the U.S. is already way up. Using new technology like “fracking” and spurred by rising oil prices, the industry is extracting millions of barrels more a week, from the waters of the Gulf of Mexico to the prairies of North Dakota. And the Obama administration has given tentative approval for new drilling in the Arctic, off the coast of Alaska, which Republicans have long supported.
PRESIDENTIAL APPROVAL RATINGS
Obama argues that no amount of domestic production can offset the broader forces driving up gas prices: Middle East instability and the ravenous energy appetite of China, which added 10 million cars in 2010.
“Anybody who tells you we can drill our way out of this problem doesn’t know what they’re talking about or just isn’t telling you the truth,” Obama said in February to college students in Florida.
But no incumbent president facing reelection wants to see gas prices this high—and rising. Since 1976, high prices at the pump have generally been inversely correlated with presidential approval ratings.
That may help explain why Obama’s approval rating fell to 41 percent in a New York Times/CBS News poll in March. Rightly or wrongly, voters often blame the president when they feel their paychecks are buying less, even though most economists agree there is little any president—from either party—can do to affect gas prices in the short run.
Of course, many other factors will help determine who voters elect in November. But people like Brian Gregory, who delivers auto parts in northern Virginia and spends about $60 most weekdays filling up his station wagon, feel the effects of higher gas prices more than a lot of other issues.
“I don’t understand health care as well as I should,” he says. “But this I can definitely understand.”
Clifford Krauss and Jeff Sommer are business reporters for The New York Times.