The price of oil is on the rise — above $100 a barrel in overnight markets — while President Obama’s approval ratings may be on the decline.
So far any change in the president’s standing has been modest, and it would be premature to conclude that higher gas prices are the cause. But if they continue to rise, what sort of threat might they pose to his re-election prospects?
There are two things we need to consider. First are the direct effects: do higher gas prices, by themselves, tend to significantly damage the president’s standing? Then there are the indirect effects: the way that higher fuel prices could ricochet onto the economic recovery, and impact variables like G.D.P. growth and inflation that have been shown to correlate with a president’s re-election chances.
Here’s the good news for Mr. Obama: there’s not a lot of evidence that oil prices are all that important.
Below is a chart considering two pieces of economic data for each presidential election since 1948: G.D.P. growth during the first three quarters of the election year (as compiled by the Yale economist Ray C. Fair), and gas prices as listed in current, inflation-adjusted dollars. For elections since 1976, gas prices are averaged for the six months (May through October) prior to the presidential election; before that, only annual estimates are available, and so that’s what the data reflects. The chart also lists the margin by which the incumbent party won or lost the popular vote.
The highest gas prices were in 2008, when John McCain lost as gas was selling at about $3.81 per gallon, and in 1980, when Jimmy Carter lost as gas cost the equivalent of $3.37 a gallon in today’s prices.
There is a big gap between 1980 and 2008 and any other recent years. The next-highest prices, however, were in 1984 and in 1956, when Republican incumbents won easily.
Over all, the relationship goes in the direction that you might expect — higher gas prices mean a poorer performance for the incumbent party — but it is fairly weak statistically. Here’s what it looks like for all elections since World War II:
And here’s the chart if we look only at cases where an incumbent president was running for another term (excluding years like 2008 in which the incumbent was term-limited).
In both cases, the relationship between the two variables falls short of being statistically significant, and gas prices only explain a small percentage of the performance of the incumbent party.
That doesn’t necessarily mean that the relationship is meaningless. Gas prices are competing against a whole host of other factors that affect elections. With a small number of data points — 16 elections since World War II — it will always be challenging to detect any signal through the noise. Those who study presidential elections need to remember that absence of evidence isn’t necessarily evidence of absence.
But to the extent there is a relationship, it seems to be in the way that energy prices can affect the broader economy. In 1980 and 2008, gas prices were very high, but the overall economy was also in shambles. This correlation is evident in some other years as well:
The upshot is this: higher gas prices are important to the extent that they affect things like G.D.P., inflation and unemployment. But there isn’t evidence that they matter above and beyond that. In a more technical sense, if you put both variables into a regression equation (see example here), there isn’t any additional explanatory power in accounting for gas prices once you’ve already accounted for measures like G.D.P.
So, for example, if the economy is growing at 4 or 5 percent in 2012, unemployment has declined significantly, and inflation remains tame, gas prices are unlikely to have much effect on Mr. Obama’s prospects. Even if they were as high as $4 per gallon, he would still be a clear favorite for re-election.
The question is just how likely that might be: how realistic is a robust economic recovery in the event that fuel prices are quite high?
One distinction we should make is between a gradual run-up in energy prices — which gives more time for consumers and businesses to adapt, and for the Federal Reserve to mitigate the inflationary effects through monetary policy — and a sudden one: what economists call a ‘shock’.
The first case — a gradual change — can be fairly benign. To some extent, in fact, a modest rise in energy prices can be a byproduct of a recovering economy, since a healthier economy stimulates more demand.
When Ben Bernanke says that he doesn’t see energy prices as much of a threat to the recovery, this is sort of the chain of events that he’s referring to. And the government’s forecasts do not anticipate a sudden increase in gas prices, if there is one at all.
Almost by definition, however, economic forecasts are not good at accounting for the possibility of sudden and supposedly unexpected changes. Given the instability in the Middle East, there may be an elevated risk of such events.
If, for example, the regime in Saudi Arabia were to fall, while that might be good from the standpoint of democratization, it could cause a significant disruption in global energy prices.
The economic literature is more definitive about the hazards that this type of price change can pose to the economy. A particularly severe shock could trigger a double-dip recession, at which point Mr. Obama’s prospects for a second term would be greatly imperiled.
This may be one reason that Mr. Obama seems to be treading so carefully in the Middle East. Until our economy is less dependent on foreign oil, the risks to an incumbent president from change in the region are mostly to the downside.