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.