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Record Gas Prices Will Put Obama's Reelection Chances, Big Oil's Tax Breaks on the Line Record Gas Prices Will Put Obama's Reelection Chances, Big Oil's Tax B...

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ANALYSIS

Record Gas Prices Will Put Obama's Reelection Chances, Big Oil's Tax Breaks on the Line

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Out of control: By Congress, that is.(Justin Sullivan/Getty Images)

$4.12 a gallon. That's the number at which the gasoline price debate enters uncharted territory. Prices at the pump are already that high in some parts of the country, of course. But if the average national price for a gallon of regular surpasses the previous record high of $4.11, set on July 17, 2008--and stays there for a significant period of time--the energy, economic, and political impacts could be profound.  

Gasoline prices already dominate the political debate, as the national average for a gallon of regular on Thursday reached $3.89. That number is climbing at the rate of one-half to one-tenth of a cent per day. And with each ratchet higher, the partisan sniping gets more heated and consumers' anger at politicians—particularly the president—grows.

 

The climbing gas prices are driving soaring profits for oil companies. ExxonMobil on Thursday reported first-quarter profits of $10.7 billion, a surge of 69 percent from the company’s first quarter of 2010, while Royal Dutch Shell profited $6.9 billion, a leap of 40 percent from the same period last year.

While the companies don't cause the run-up in prices, they are the biggest beneficiaries of price spikes that cause pain at the pump--and throughout the economy--for voters and consumers.

That makes the industry, which has a long history of political allegiance with Republicans and oil-state Democrats, a top target in the gas price debate. And voter ire over the companies' profits could further drive a push to end the tax breaks they've long enjoyed.

 

The debate is deeply familiar. Republicans are calling for more drilling, slamming Democrats for slowing access to new oil supply. Democrats claim Republicans are in the pockets of Big Oil. 

And all the while, analysts remind everyone that the complex global oil market is largely immune to small policy moves from either party in Congress.

For now, few in Washington believe that high gasoline prices will lead to new energy policy. In a National Journal poll of energy and environment policy insiders, 57 percent of respondents said higher gasoline prices will not lead to new energy legislation before the 2012 elections. 

But if prices reach heights never before experienced, could that change?

 

“Once it gets past [$4.12], no one really knows what happens,” said Scott Slesinger, legislative director for the Natural Resources Defense Council.

While record prices alone might not drive comprehensive change in energy policy, it could be enough to force cracks in policies once thought untouchable.

One area that could face the chopping block is the $4 billion in annual subsidies and tax breaks now enjoyed by Big Oil. Democrats have tried and failed to roll these back (some have been in place for nearly a century) since they took control of Congress in 2007. 

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House Speaker John Boehner told ABC this week he was open to "taking a look at" repealing some of the tax breaks. Although Boehner's office and Republican leaders have since scrambled to walk back that remark, President Obama hailed it and Democratic Hill leaders want votes on the issue.

And with large oil companies reporting significant first-quarter profits, once rock-solid support for the tax breaks could potentially crumble. "Absolutely, it’s vulnerable," said Charles Ebinger, an energy and economic policy expert at the Brookings Institute. "People think, 'They’re getting $4 billion and I’m paying $4 a gallon.' "

The fight over tax breaks could be similar to the way offshore drilling became a central issue in the 2008 presidential campaign once gas hit record highs. The Republican National Convention was rocked by cries of "Drill, baby, drill!" House Republicans stayed in the darkened House chamber during the August recess, calling for an end to the two-decade moratorium on offshore drilling. Angry voters at town hall meetings called for the same thing, leading to a reluctant Democratic House voting to open the waters off the east and west coasts for drilling. 

The 2008 lifting of the moratorium “took a lot of people by surprise,” said Rayola Dougher, senior economic adviser at the American Petroleum Institute, the chief lobbying arm of the oil industry. If prices top $4.12 this year, "I don’t know what will happen," she said. "But the alarm is going to be greater."

Certainly it will once again put gas prices at the center of the presidential campaign, and the higher gas prices climb, the more it’s likely to hurt Obama, who recently pointed out that his own approval ratings fall the more gas prices rise.

That’s in part because high gasoline prices will threaten the economic recovery, taking a greater bite out of consumers’ pocketbooks while driving up food and commodities prices.

"Every dollar that crude prices grow—that drains foreign exchange, weakens the dollar,” Ebinger said. "[It] will have a ripple effect throughout every aspect of the economy. And it will mean that energy is back on the table as a major campaign issue."

But rolling back tax breaks, just like lifting the drilling ban, would not lower the price of gas or lead to a transition to the use of clean fuels. 

"The prices that would be required to prompt a breakdown in business as usual would be higher than even record-breaking prices of $4 or $5 a gallon," said Robert Stavins, an energy and environmental economist at Harvard University. 

It’s possible that prices could get that high. Two of the biggest factors driving global oil prices are political unrest in the Middle East and growing demand for oil from developing nations, particularly China and other Asian countries. 

But experts interviewed all declined to prognosticate on where those factors might take gas prices. "It's anybody's guess," said Stavins.

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