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Getting Energized
We're reactive on oil; that won't cut it.


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Presidents face high gasoline prices at their peril. Take for example Presidents Nixon and Carter. The United States suffered two great oil shocks in the 1970s. The first came October 17, 1973, when Arab states placed an embargo on oil as punishment for U.S. support for Israel in the Yom Kippur War. Oil prices roughly doubled, and stayed at that level until the late 1970s, when they tripled. Both presidents during the oil shocks were out of a job within a year. In Richard Nixon’s case, the oil embargo hit after his approval rating had dropped from the 50s to the 30s, eroded steadily by the Watergate hearings. With the embargo, his rating dropped immediately into the 20s, where it mostly stayed until he resigned in August 1974. Jimmy Carter’s approval rating went from 47 percent to 28 percent in three months in the spring of 1979, as oil prices rose precipitously, spurred by events in Iran. Carter clawed his way back in the winter and following spring, his political energies focused by a primary challenge and America rallying around him during the early stages of the hostage crisis and the Soviet invasion of Afghanistan. But oil prices kept rising, and by May of 1980 his ratings were back down in the 30s where they remained until the election.

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This is not to say that presidents cannot get into trouble without rising gas prices–witness Bill Clinton. However, note that from May 1996 to February 1999, through the election campaign and the Impeachment, gasoline prices steadily declined, bottoming out at $1.03 in 2004 dollars, which at the time was a very psychologically satisfying 92.6-cents-per-gallon average. In Washington, D.C. one could buy gas in the 85-cent range or lower. In that respect, life was good. One wonders if Clinton would have been removed from office had he faced the same oil situation Nixon and Carter had.

Presidents suffer when gas prices rise because fuel costs have a direct impact on the national mood. People are made constantly aware of the price of gasoline–it is displayed on signs at every busy intersection. Gasoline is a necessity, and when prices go up, family disposable income goes down. This depresses non-petroleum retail sales. And there are negative macro effects as well. Because energy is an important component of manufacturing and shipping costs, rising oil prices depress GDP growth and increase inflation. Business profits that might have been used to create jobs go instead to offsetting rising overhead. In the short run there are few if any benefits to rapidly rising oil prices. That said, it is worth noting that gasoline prices are not at an all-time high right now in real terms. Gasoline was $2.83/gallon in 1980-81, using 2004 dollars. In addition, today’s price for a gallon of gas reflects a much higher excise tax than two decades ago. The federal tax has tripled in real dollars, and most state taxes have gone much higher. So $2.01 is not a record–but it is getting close, and is a far cry from where we were five years ago. Moreover, the very sight of the number “2″ will deal a psychological blow far out of proportion to its economic impact.

The oil producers on the other hand are enjoying a windfall. The increased cash flow may help Saudi Arabia contend with the increasingly evident effects of its developing systemic crisis, and give the Russian economy a needed boost. Most OPEC states are paying lip service to lowering the price of oil, but some would rather take the money. Venezuelan President Hugo Chavez, who recently called the United States a terrorist country and has pledged to help defeat President Bush in November, has resisted suggestions that OPEC increase production. He blames the price rise on the war in Iraq, and believes this is poetic justice for the administration. But one cannot blame the current spike on war. In recent years, war has had little if any dramatic effect on gasoline prices. On September 10, 2001, the national average for a gallon of unleaded regular was $1.54. By December 17, with the War on Terrorism fully raging, the price had dropped to $1.08. Prices stayed flat during the first Gulf War, and they dropped 15 percent during major combat in Operation Iraqi Freedom. One might better blame the production shortfall not on the war but on the peace. Iraq is currently producing 1.95 million barrels of oil per day. This is one million barrels below the target of three million, which was the level Iraq had sustained prior to August 1990. Surprisingly, Iraq was also producing that much crude in 2000, despite the so-called sanctions regime (and these were the official production figures; who knows how much more oil went unreported?) OPEC cut production believing that liberated Iraq would produce at least as much as Saddam had. However, the postwar peak in April 2004 was still half a million barrels short, and since then has dropped to its current million barrel per day deficit.

There is little President Bush can do immediately to mitigate this problem. John Kerry’s quick-fix suggestion that the strategic petroleum reserve be opened is simply another example of political opportunism; he made more sense in 2000 when he opposed opening the reserve. But there is a great deal the president can do in the long run. The United States needs to make energy security an integral part of our national strategy. Our approach to this issue has been consistently reactive, seeking global-energy stability rather than solving the long-term energy problem. But the result of that policy has been to send billions dollars into a region that has used our money to export terrorism, pursue dangerous weapons programs, and underwrite the promulgation of belief systems that are hostile to our principles, values, and way of life. We continue to do this today. In the process, we have made our country and our economy increasingly vulnerable to hostile states and non-state actors. Recent al Qaeda attacks on Saudi oil facilities and the warning issued yesterday to energy facilities in the United States to be on guard for possible terrorism tell us that the foe understands this weakness. A strategic plan for secure and sustained energy would have many elements–shifting imports to more stable, friendlier countries, exploiting more domestic resources, pursuing alternative energy sources, and rapidly promoting the use of breakthrough technologies such as the thermal depolymerization process (that can extract crude oil from refuse ranging from old tires to agricultural waste)–but it will require leadership to set goals and coordinate action. Energy competition will be a key geopolitical factor in the 21st century–as it was in the last century. We need to get serious, before the decision is taken out of our hands.



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