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.
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
None of this is lost on political strategists.
Typically, voter ire over high energy prices is directed at the incumbent president, and Republicans especially have capitalized on the issue by slamming Democrats for blocking new domestic oil drilling. Such attacks resonate more in a weak economy. And this year, Republicans and the oil industry will also seize on high oil prices to attack President Obama on the fate of the Keystone XL pipeline, a proposed 1,700-mile project that would carry oil from the Canadian tar sands to Gulf Coast refineries. Obama’s environmental base has threatened to desert him if he approves the pipeline; if he denies it, Republicans have vowed to attack him for it nonstop.
The National Republican Congressional Committee this week sent out e-mail blasts to the home districts of over 50 vulnerable Democratic members of Congress, asking, “Will Dems urge Obama to support American Keystone jobs or send them to China?”
The American Petroleum Institute, the lobbying arm of the oil industry, on Wednesday kicked off “Vote 4 Energy,” a lobbying, advertising, and media push aimed at injecting oil and gas issues into the heart of 2012 political campaigns. While the industry effort will be national, it will get especially target the electoral swing states of Ohio, Pennsylvania, and Virginia.
“The cost of energy in all forms is more and more an election issue,” said Jack Gerard, API’s president.
“API has worked hard to engage the energy discussion, particularly in primary states,” Gerard said, adding that the “election year presents the perfect opportunity to encourage that discussion. We expect energy issues to figure prominently in voting decisions.”
Gerard said the campaign is not meant to be partisan. However, he explicitly criticized the Obama administration — slamming the Interior Department’s new five-year drilling plan, which did not include earlier proposals to drill off the coast of Virginia.
Traditionally, the petroleum industry’s political interests are more aligned with GOP candidates; between 1998 and 2010, the oil and gas industry gave 75 percent of its $284 million in political contributions to Republicans.
According to Gerard, the president’s decision on the Keystone pipeline will have “enormous political consequences.”
“Anything other than approving Keystone would be at odds with what the majority of American voters want,” he said.
Democratic political strategists acknowledged that the combination of high gas prices and a sluggish economy will hurt Obama politically. They are preparing go on the defensive on energy issues, with plans to highlight the president’s landmark deals with the auto industry to raise fuel-economy standards, thereby reducing projected U.S. oil consumption. They also plan to use a standard line of defense on oil prices, accusing Republicans of being in the pockets of Big Oil, which sees record profits when prices are high.
“No incumbent president wants to deal with high gas prices, especially in economic conditions like this,” wrote Bill Burton, a former Obama spokesman who now heads Priorities USA Action, a political action group that supports Democratic candidates. “It is certainly something that people in both parties are watching. Looking ahead to the general election, however, it will be crystal clear that it is oil company profits that are funding Republican campaigns and groups.”
Ben LaBolt, a spokesman for President Obama’s reelection campaign, said in an e-mail that, “The record on energy is clear: Under President Obama, the amount of oil we consume and import has gone down, while domestic production has gone up. President Obama passed historic fuel-economy standards, which will save consumers money at the pump and ensure we produce the cars of the future here in America.
“Rather than offering a plan to restore economic security for the middle class, the Republican candidates would force the middle class to foot the bill for more special breaks for millionaires, billionaires, and large corporations like oil and gas companies,” he said.
The Obama campaign is trying to find a balance between appeasing environmental-minded voters who fiercely oppose the Keystone pipeline and demonstrating that it does favor some domestic drilling. For example, the administration is set in the coming months to give its final stamp of approval to Shell Oil for the first oil drilling in the Arctic Ocean off the coast of Alaska. Exploration is set to start this summer, when gasoline prices are projected to be approaching annual highs — giving the Obama campaign a new drilling project to point to just when voter ire and Republican attacks over high gas prices could reach a pinnacle.