President Obama seems to be enjoying some good luck in that the economy appears to be picking up just in time for his re-election campaign. While the economy is still weak by almost any measure, growth is likely to be in the 2.5-3.0 percent range for 2012. This should lead to the creation of close to 2 million jobs and a modest drop in the unemployment rate.
That is not much to cheer about in an economy that is still down close to 10 million jobs from its trend level; however, compared to the recent past, this is good news. And research shows that voters tend to focus primarily on the direction of change. This means that if the unemployment rate is falling and the economy is creating jobs at a respectable pace throughout the year, President Obama stands a very good chance of being re-elected in November.
This explains the decision of the Republican Party to focus on the price of gas. The price of gas has long played a pivotal role in U.S. politics. High gas prices will be forever a symbol of the economic malaise of the Carter presidency in the late '70s. The drop in gas prices under President Reagan was associated with a resurgence of America's political and economic power.
The fact that both the rise in the price of oil in the '70s and the subsequent decline in the 80s had little to do with domestic policy decisions and much more with international politics (e.g. the Iranian revolution in 1979) mattered little. President Carter got the blame for events beyond his control and President Reagan got the credit.
The Republicans are hoping to benefit from this pattern again in the fall election. Gas prices had plummeted following the economic collapse in 2008, falling as low as $2.00 a gallon, half of their pre-recession peak. However, in the last two years they have been on the rise as the world economy recovers and instability in the Middle East and the possibility of a war with Iran threaten the oil supply from the region. Gas prices are almost certain to soar past $4.00 a gallon in the peak summer driving season.
The Republicans are hoping to blame this rise in the price of gas on President Obama's environmentally friendly policies. As a matter of logic, there are two basic problems in this story. First, President Obama's policies have not been especially friendly to the environment.
He has opened up large portions of previously protected coastal areas to drilling. Oil production has risen substantially in his three years in office and is now back near the peaks reach in 2002. While some areas do remain protected, even if every last piece of land and coastline had been opened to drilling on his first day in office it would not have increased production much beyond current levels.
The other problem with the Republican complaints is that production in the United States really does not matter much for the price of gas. Oil prices in the United States depend on the world market, not just supply and demand in the United States.
U.S. production is roughly 8 million barrels a day, it accounts for less than 9 percent of a world-wide market that is close to 90 million barrels a day. Even if U.S. production could be increased by a third (an almost impossible increase) it would only increase world supply by 3 percent. This would lower the price of oil by 7-8 percent. This is not trivial, but it is not the difference between $2 a gallon gas and $4 a gallon gas. In other words, there is nothing that the United States can do in terms of its domestic production that would bring gas prices down to the levels that would make many American car owners happy.
The other part of this story is that U.S. proven reserves are in the neighborhood of 20 billion barrels. At our current rate of production we would exhaust them in around 10 years. If we could somehow increase production by a third that would bring the date of exhaustion to just 7 years in the future. This would mean that we would be seeing sharply lower production levels before the end of President Drill Everywhere's second term.
That is the arithmetic of the situation, but the Republicans are betting that they can get away with their story nonetheless. The public is almost completely ignorant of the dynamics of world oil markets. It is widely believed that prices are determined domestically and that if upscale environmentalists did not get in the way, we could drill out enough oil so that gas prices would be cheap again.
Since the media consider it to be their job to report what candidates say and not assess its accuracy, it is likely that the public will go the polls believing that we can again get cheap gas if we just destroyed the environment. The reality is that we have the ability the do the latter.
Editor's Note: This post has been updated since its original publication.