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Rising Oil Prices Could Fuel Political Rage Rising Oil Prices Could Fuel Political Rage

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ENERGY

Rising Oil Prices Could Fuel Political Rage

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With threats to the Strait of Hormuz, look for price spikes in oil and gas.(AP Photo/Rick Bowmer)

Get ready for the return of gasoline price wars.

Spurred chiefly by Iranian threats to cut off Persian Gulf oil shipping through the Strait of Hormuz, oil and gasoline prices look to be set for a volatile run — including possible price spikes — in 2012. That would have major economic and political repercussions as the fragile U.S. economy continues to struggle to emerge from recession in this presidential-election year.

 

Already, 2011 closed out as the year with the highest average annual oil price in the 150-year history of the modern oil industry at $111 for a barrel of Brent crude, 13 percent higher than the previous record of $98 a barrel in 2008. U.S. gasoline prices also reached a record annual average high at $3.52 for a gallon of regular.

Government and industry analysts predict that those prices will only continue to rise in the coming year. That has economists nervous and political strategists drafting gas-price themed campaign ads.

Going Up

The price of oil fell drastically with the most recent economic recession but is climbing once more.

 
Price per barrel of West Texas intermediate crude oil (Nov. 2011 dollars)
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Source: Energy Information Administration

Economists and politicians are fully aware that nine of the 11 U.S. recessions since World War II were preceded by run-ups in oil and gasoline prices. A cutoff in supply — or just market uncertainty over the threat of a supply loss — can send prices quickly soaring, taking spending power away from consumers and transferring it to oil producers abroad as well as slowing growth and potentially kneecapping an already fragile economy.

That’s the scenario economists say could loom in the coming months, and it's one that could have a big impact on a presidential campaign that will hinge on the state of the economy.     

Iranian saber-rattling and accompanying high oil and gas prices “will be a negative for the U.S. economy. And it’s certainly recognized by politicians in Washington,” said Daniel Yergin, an energy analyst and author of the book, The Quest: Energy, Security and the Remaking of the Modern World.

Economists say that if Iran actually follows through on its threats to shut the Strait of Hormuz, it could trigger a price spike (from today’s average price of about $100 a barrel to as high as $200 a barrel) high enough to send the U.S. economy back into recession. But most Middle East experts say that scenario is probably unlikely.

 

Analysts predict that Iran will continue its threats in the coming months, keeping prices above the $100-a-barrel mark, and that the uncertainty will probably lead to volatile price fluctuations — all of which will significantly slow U.S. economic growth, but not reverse it.

Still, there is the potential for gasoline prices to rise by spring to above $4 a gallon, a number certain to infuriate voters and to vault the topic energy prices to the forefront of political campaigns.

“If it gets back up to $4 a  gallon gasoline, this will be an election issue. With these kinds of sanctions towards Iran, we’re moving to a new arena in an oil market — and no signs of turning back from it,” Yergin said.

The average national price of gasoline reached its record high of $4.11 in July 2008, triggering cries of “Drill, baby, drill!” at the Republican National Convention later that summer. The price spike also helped push the economy toward the recession that took hold after the financial-system meltdown in the fall.

It’s worth noting that as the U.S. economy struggles to get back on its feet in 2012, there are other factors besides oil prices that could keep it down. Chief among them, for example, is the possibility of a deepening economic crisis in Europe. If European economies crumble and countries drop the euro as a currency, the ripple effects could have a far worse impact on the U.S. economy than high oil prices (and could also depress oil prices if demand from Europe wanes).

“The political impasse on economic issues in Washington, the lack of coordinated fiscal policy, and what’s going on in Europe, what they’re going to do on the currency issue — those issues, in my view, overwhelm what’s happening on the oil issue,” said Hillard Huntington, executive director of Stanford University’s Energy Modeling Forum.

But for U.S. voters worried about their pocketbooks, Huntington said, “price at the pump seems like it has a bigger effect on your life than the eurozone.” s

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