Curious Capitalist

Will High Gas Prices Hurt Obama?

Fears over conflict in the Middle East are pushing gasoline towards the $4 per gallon mark. What will that mean for the presidential elections?

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Saul Loeb / AFP / Getty Images

Oil hit a 9-month high yesterday thanks to Iran halting exports to Europe in advance of a ban on Persian oil. Pundits have in recent days been crowing that the resulting higher gas prices, which could go above $4 a gallon within the next few weeks if tensions in Iran continue, could hurt the president’s election prospects. Republicans like John Boehner are urging conservative politicians to embrace “pump anger.” Given that President Obama already took a fair bit of heat for vetoing the Keystone pipeline that would have brought more Canadian oil and gas to the U.S., are we about to see a reprise of the popular “Drill Baby Drill” conservative campaign slogans of 2008? Probably not. As is almost always the case when it comes to oil fears, these current ones are overblown. Here’s why.

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1.     There’s no real supply shock, at least not yet.  Iran’s announcement that it would stop selling oil to a number of European countries was hardly a surprise – the suspension just preempts an EU embargo set to come into effect in July. OPEC nations, in particular Saudi Arabia, have been preparing for this for some time. “The Saudis are able and willing to meet any shortfall, and Libyan production is also coming back on stream more quickly than many anticipated,” says Capital Economics chief European economist Julian Jessop. Yes, a real supply shortage would mean higher prices beyond just this summer, but we aren’t there yet. So far, it’s the fear factor that’s keeping oil anywhere from $20 to $40 a barrel more than many analysts think it should be, as is always the case after the threat of a supply constraint. (Oil markets are extremely volatile and very much driven by investor emotion.) Assuming there’s no actual conflict in the Middle East, prices will be back down by fall.

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2.     The European economy isn’t getting better anytime soon. Those European countries weren’t going to need much oil anyway, since their economies are going nowhere fast. Yes, the news of a Greek debt deal helped bolster prices this week, but really, does anyone think that this latest “comprehensive fix” is going to solve Europe’s problems? (Particularly after the FT uncovered a “confidential” European report showing that Greece’s debt woes are about twice what we thought they were.) We’ve seen this movie several times since last summer, and we know how it ends.

3.     Emerging markets are slowing down. Oil and emerging markets are part of a dysfunctional chicken-and-egg cycle. Investors buy oil as a way of getting a piece of the China growth story, which in turn revs up the economies of commodities rich nations like Brazil and Russia. But the idea that China and other energy hungry developing markets will keep driving up oil prices forever is just plain wrong. In fact, it’s what Ruchir Sharma, the head of emerging markets at Morgan Stanley, calls “commodity.com.” And like all bubbles, it will eventually burst. Already, many emerging markets are slowing down this year, and higher oil prices will ensure that they slow even faster.

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Bottom line: Oil and gas will be lower by November. And “pump anger” will be a non-issue in the election.

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