Monday, December 19, 2011

Will High Cost of Oil Damage Obama's Reelection Bid in 2012?

The approach of the end of the year is leading to the release of a deluge of economic forecasts for 2012. However, most of the forecasts based on historic modeling are garbage in garbage out. The high cost of oil and the European debt crisis are severely negative events that are not being given nearly enough weight by these backward looking models.

The U.S. economy is so fragile due to high unemployment, declining housing prices, high levels of household debt, and the growing number of senior citizens disposing of assets, that GDP will only grow a couple of percent in 2011 even with a trillion dollars of fiscal stimulus and an accommodating Federal Reserve. The high cost of oil and collateral damage from Europe's problems may tip the U.S. back into recession in 2012. President Obama's popularity ratings are already at record lows, even with an economy that is making moderate progress in reducing unemployment rates. His chance of reelection will dim if the economy takes a hit due to high oil prices.

High oil prices hit consumers directly in the pocketbook due to higher transportation and higher food costs. Since commuting and food expenses are necessities, workers cut back on discretionary spending when oil prices are high. Businesses are affected by cuts in consumer discretionary spending and hire fewer employees resulting in the economy and the unemployment rate remain stagnant.

The anti fossil fuel zealots in the Obama administration's EPA are contributing to the high cost of oil in the U.S. The moratorium on drilling in the Gulf  has probably led to oil production being down about 100,000 barrels a day versus where it otherwise would be. Also, other EPA restrictions on new drilling are holding down production. The oil boomlet from fracking is in large part due to the EPA not being able to regulate it.  This vibrant area of the U.S. economy is probably only experiencing growth because the Energy Policy Act of 2005 explicitly exempting fracking from the requirements of the Safe Drinking Water Act, the Clean Air Act, and the Clean Water Act. Leaving the regulation of fracking up to the states is working out fairly well. It is perturbing to realize that the job killing EPA is already drawing up regulations for fracking. While it is imperative that drinking water be protected from fracking activity, the states seem to be finding their way to appropriate regulations. 

The anti fossil fuel zealots in the EPA are totally disconnected from economic reality. Their infatuation with solar and wind energy ignores the fact that it only produces electricity and is barely of any use as a transportation fuel. The U.S. will be dependent on oil as our primary transportation fuel for decades. Restricting oil drilling activity in the Gulf and the rest of the U.S. has little impact on total world wide consumption of oil, but does increase the U.S.  imports of oil and hurts our economy. Thus, the anti fossil fuel zealots in the EPA are contributing to the high cost of oil, a weakened U.S economy and the unpopularity of President Obama. 

The high cost of oil and the administration's antipathy to U.S. oil drilling will be a huge obstacle to the Obama reelection bid in 2012. The high price of gasoline, most likely over $4.00 per gallon during the summer, will cost President Obama votes. The weakness in the  U.S. economy caused by the high cost of oil will be an issue that garners votes for the Republican candidate for President.

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Do 2012 Economic Forecasts for U.S. Foolishly Discount High Cost of Oil?

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