Several months’ worth of strong labor market data have put a crimp in Republican plans to run against Barack Obama as the second coming of Herbert Hoover. Fortunately for GOP candidates—if not for most Americans—gasoline prices are up about 29 cents a gallon since December, offering a bounteous new economic issue to complain about. Rick Santorum says we can blame the president’s “radical environmental policies” for the pain at the pump. The White House is pushing out news stories about increased oil production to try to counter that narrative, but Newt Gingrich has upped the ante with a promise to bring gas prices down to $2.50 a gallon. John Boehner is urging members of his caucus to wield gas prices as a weapon, field-testing the line that “gas prices have more than doubled since the president took office.”
A good rule of thumb is that if politicians are talking about the price of gas, they’re talking nonsense. This week is no exception.
Boehner’s line is a good place to start. Gas prices are indeed way higher than they were on Inauguration Day. That’s in part because the winter of 2008-09 was the cheapest moment for gas prices that we’ve seen in years. Do we remember what else was going on back then? That’s right—a global financial crisis that tipped the entire world into recession. It turns out that driving to work, ferrying stuff from the warehouse to the store, hauling containers across the Pacific Ocean, and flying around to meetings all takes oil. If you manage to orchestrate a situation in which millions of people lose their jobs, retail sales plummet, stores close, and economic activity generally grinds to a halt, this frees up a lot of extra oil. Cheap oil leads to cheap gasoline, so if you did have a job at the depths of the recession your commute got cheap.
And good for you. But this should all serve as a reminder that there’s little constructive action the American government can take to lower the price of gasoline.
What’s more, while voters would obviously prefer cheaper gas to more expensive gas, there’s little reason to believe that expensive oil per se is a sign of political trouble for the president. Last—but by no means least—it can’t be emphasized enough that gasoline is actually unusually cheap in the United States in a way that’s problematic for our economy over the long run.
The basic model of the impact of oil on the economy, and thus the political system, is one that’s largely derived from the supply disruptions of the 1970s. In these famous episodes, OPEC deliberately curtailed the global supply of oil, pushing prices up.
Supply disruptions of that sort are unambiguously bad for the economies of oil-importing nations. The higher prices suck American financial resources abroad to oil producers. The oil producers, in turn, spend some of their earnings on current consumption, but channel much back into American bonds. Foreign bond purchases normally lower interest rates, which can spur spending, but the Fed is often reluctant to cut interest rates since at the same time the high gas prices push inflation up.
This is all bad news for the economy. Insofar as oil prices are rising today because of fears of a war with Iran, that’s a legitimate problem for American growth and it would be perfectly fair to point the finger at Obama (except for the small problem that his critics want to castigate him for insufficient saber-rattling at Iran).
Conversely, increased global supply of oil would be economic good news. But it’s simply not true that Obama’s policies are curtailing oil production. On the contrary, U.S. oil production tumbled during the Bush administration and has skyrocketed under Obama. Obama really has hurt the oil industry by declining to approve the Keystone XL pipeline, but as the point of this pipeline is to facilitate the export of fossil fuels its construction would, if anything, make gasoline more expensive.
Meanwhile, nothing Santorum or Boehner or Gingrich or Obama says is going to change the fact that the United States is an increasingly small part of the global demand picture. When China, India, or Brazil get richer, their citizens start trading bicycles for scooters and mopeds for cars. They’re flying more airplanes. This increases the global demand for oil and pushes prices up. All else being equal, this is inconvenient for American drivers. But it’s far from clear that it’s on net harmful to the American economy. American firms are hoping to export goods and services to rapidly growing economies. Every time Boeing sells a plane to an Asian airline, that increases the demand for jet fuel and makes driving marginally more expensive. But we’re better off in the fast-growing world than in the slow-growth, cheap-gas world of three years ago.
The real problem is not that gas gets expensive sometimes, but that the United States, with its extremely high levels of per capita oil consumption, is much more vulnerable to supply disruptions than are rich countries in Asia and Europe. A larger share of Americans drive on a daily basis, and they drive heavier cars longer distances. Not coincidentally, gasoline is cheaper here thanks to lower taxes. But while American politicians like to pay lip service to the idea of tax reform that encourages work and investment, they refuse for political reasons to levy higher fees on environmentally and economically destructive gasoline in exchange for lower taxes on socially beneficial labor and savings. Until that happens we’re doomed to endless repetition of the pointless gas-price blame game every time global conditions push prices up.
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