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The Spectacle Blog
UCSD economist James Hamilton is worried about the price of oil, currently hovering around $90 a barrel. Hamilton has argued that the spike in the price of oil in 2008 created a supply shock that played an underrated role in creating the Great Recession. After all, oil is an input for almost every good that is produced in a modern economy. Hamilton notes that, with the recovery as weak as it is now, a significant increase in energy and transportation costs could choke the struggling rebound in the auto sector and lead to greater widespread economic turmoil. In other words, if oil gets too much more expensive, the economy could revert back to where it was in 2008 or 2009.
Needless to say, that would be a terrible development in many different ways. But it’s interesting to think of the effects that an spike in the price of oil would have on the political landscape, if only because the political events of 2008 followed Hamilton’s economic narrative very closely.
The popular wisdom is that John McCain lost the presidential election once and for all when he suspended his campaign in September, in the middle of the financial crisis, to return to Washington to work on rescue package negotations. It was believed that before that decision, he had effectively rallied the Republican base by choosing Sarah Palin as his running mate, with the result that he was tied or even ahead of Obama in most of the polls in early September. When he left his campaign and subsequently appeared useless in the TARP negotiations, though, he slipped in the polls and never caught up again.
I think a simple graph of gas prices over that period explains the 2008 election much better than the popular narrative. Here’s the one Hamilton uses (click for a bigger version):
The price of gas peaked above $4 a gallon in late summer 2008. At that time, Republicans had a very simple proposed solution for gas prices — “drill baby drill” — that Obama could not match, for obvious reasons. And no one was better situated to deliver that solution than Palin, who was already famous for favoring drilling in ANWR and trying to build a pipeline from Alaska to the continental U.S. The price of gas was the most pressing economic concern for most people, and McCain, with Palin, was able to capitalize on that issue in early September.
In late September, though, the price of oil fell precipitously as the financial crisis unfolded and led to a worldwide recession. The global downturn sharply reduced the demand for all commodities, especially oil. The almost-vertical line in the chart represents the effect of the financial crisis on oil prices.
It hardly seems coincidental that it also closely mirrors the McCain-Palin campaign’s fortunes. It may have been a serious strategical error for McCain to suspend his campaign to try to supervise the TARP vote, but it seems trivial compared to the historic financial crisis that was playing out in the background. Fairly or unfairly, that crisis was blamed on George Bush and, by association, Republicans, including McCain.
In other words, if the electorate’s concerns are a useful indication, they strengthen Hamilton’s case that oil prices were an underappreciated contributor to the recession. If McCain’s polling was a proxy for concerns about oil prices and Obama’s about the broader economy, then voters worried about oil prices until they led into the Great Recession. It seems as though voters knew, one way or another, what they should be concerned about.
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More Blog Posts by Joseph Lawler
http://spectator.org/blog/2010/12/10/oil-prices-the-economy-and-pol
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owyheewine| 12.10.10 @ 12:21PM
I stay baffled that the role of suddenly increasing energy prices is not recognized as a major contributor to all economic slowdowns. It has been repeated over and over for the last 40 years.
Energy runs the world, and when the price increases rapidly, the economic engine slows down until producers of goods can adjust to the new cost of doing business. The good news is that in a free economy, market adjustments can overcome the change. In controlled state dominated economies, technically ignorant, innovation challenged bureaucracy just sits dombfounded as their economies founder.
A double lesson here.
Oldefarte| 12.10.10 @ 12:36PM
Oil prises will rise and fall according to the economy's demand and supply for same, and McCain's actions were not a determinate of same. Morons [especially of the Democratic Party variety] have to attempt to understand the basic theory of oil. Most everything we do economically speaking is dependent upon the supply of oil. For decades the ignorant Democrats have proclaimed their Gorism BS concerning the threats to the environment concerning oil exploration, to the exclusing of our [above] dire dependency for same; and because of same, more and more oil producers have transferred their [former] oil exploration operations to middle eastern countries that do not restrict same due to environmental reasons. These countries are also dominated by Muslim terrorists operations, and their rulers have siphoned off profits from their oil operations to these terrorists in order to maintain their governmental powers. Therefore, due to Democrats' lunatic environmental rantings, our domestic oil production has shrunk and we are now having to buy more oil from these middle eastern/enemy countries in order to supply our domestic consumtive critical needs. If we are to survive as a viable capitalistic [as opposed to third world type] country, we must vote [radical] Democrats out of office; and begin to restore our domestic/offshore oil production operations!!!!!!!!!!!!!
Have you considered| 12.10.10 @ 2:21PM
Agree Oldefart. Additionally, now put yourself in say Exxon's shoes. Lets say you have 2 billion to spend in exploration and source development. In light of the current drilling moratorium (both implicit and explicit) and the possibility of being nationalized, as many in our MSM actually advocated for, are you now more, or less, likely to develop those potentials here in the US? Were it me, I would not. Not only the environmental issues, but the possibility of outright confiscation of property would weight the risks as being too great.
Oldefarte| 12.10.10 @ 3:57PM
Have You: I would choose to do what I've done recently on 11/2/10, and that is to VOTE THE STRAIGHT REPUBLICAN POLITICAL TICKET. Hopefully the new Republicans coming to DC can persuade the old ones to completely shake things up and to begin the needed process of SUBSTANTIALLY CUTTING GOVERNMENTAL SPENDING [and similarly to purge the government eventually of the socialist-Democrats that are responsible for oil companies having to relocate to foreign countries in order to explore, discover and produce our needed offshore oil reserves]. The issue IMO is not to compromise or abondon responsible governmental principles, but to defeat these domestic terrorists Democrats, and therefore to restore our country to its former greatness. Our offshore oil/energy reserves are extremely plentiful, and should be fully developed and thereafter dedicated to our domestic purposes primarily. This Democrat administration's moratorium on offshore oil/energy development recently is an abomination, is detrimental to this country, and IMO those elected officials responsible for same should be legally prosecuted and imprisoned if necessary. Hope that answers your previous questions!!!!
Have you considered| 12.10.10 @ 4:44PM
Oldefart, my questions were actually rhetorical. I used the post simply to point out that the moratorium was an additional barrier to resource production from the point of view of the investor. This will damage resource production long into the future IMHO. That said, I also voted for all Republicans, except for senator. I could not in good faith vote for McCain, so I voted for the Libertarian.
I too was hoping that the Republican win on 11/2 would usher in a new era of reduced spending, but after seeing what the GOP senators just put on the table in the way of a tax compromise with all the "green" subsidies, I find my hopes fading fast. From a constitutional perspective, I simply can't lay my finger upon the language in that august document that allows appropriations for this.
Occam's Tool| 12.10.10 @ 11:36PM
Well, I voted straight Republican, too. Didn't like Emmer, but he was better than Dayton. Fortunately, my least favorite Congressman, Jim Oberstar, was defeated.
jgo| 12.10.10 @ 3:10PM
All the more reason to end the exploration moratorium, and encourage the building/rebuilding of refineries (we have only half the number we did in the 1970s) so that the eggs are spread amongst more baskets.
Oldefarte| 12.10.10 @ 4:00PM
Agreed, but that can/will happen ONLY IF the current Democrats are defeated in 2012 and beyond!!!!!
Stan Redmond| 12.10.10 @ 3:28PM
We can thank ouir environmental policies for unstable oil prices. For decades we have been at the mercy of the radical environmentalists. OIL IS THE BLOOD OF OUR ECONOMY. Environmentalists have ensured we have NO stable supply and left us at the mercy of the collection of backward cesspool countries in OPEC. We can't drill, we can't explore, we can't replace oil burning powerplants with nuclear, we can't explore liquified coal... We are suppose to give our wealth, health, and safety up for the dream of a windmill and some solar panels.
Oldefarte| 12.10.10 @ 4:05PM
Completely agree! The well-paying jobs that oil exploration [in the Gulf region plus] are additional reasons why this morotorium should be lifted, the governmental officials responsible for politically placing same should be legally prosecuted, and oil comanies should be allowed to drill/explore all of our offshore oil potential reserves!!!!
Bob the Engineer| 12.10.10 @ 4:16PM
I work in the auto parts supply industry. I saw sales of trucks and SUVs plummet when gas hit $4 per gallon and that is when the car companies started to lose money. Then GM became Government Motors. As fragile as the economy is now, a return to $4 gas will be devastating.
All the green energy types fail to realize that this country and the world move on liquid fuels. If you doubt it, when was the last time you rode on a solar or wind powered airplane? I think we need a crash program to increase domestic oil production and to produce synthetic fuels from coal.
owyheewine| 12.10.10 @ 5:05PM
Recent oil proce movement has not been from supply/demand balance. It has become a replacement for the overleveraged mortgage hocus pocus that the NY banking industry and Fanny/Freddy cooked up to skim money from mostly innocent principals.
There are over 100 barrels of paper oil traded for every barrel of oil that is actually consumed. It is traded at 10 cents on the dollar so the legerage is huge. Supply has exceeded demand for more than a year, and millions of barrels are floating in tankers or stashed in tankage throughout the world. The paper traders are manipulating the price at the expense of suckers buying energy ETFs along with the rest of us who end up paying higher prices.
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