How High Gas Prices Could Help Obama

Gas prices are on the rise, but they could be falling by Election Day.

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If the 2012 elections were held in May, President Obama might face dire reelection odds.

By late spring, gas prices, which are now around $3.80 per gallon, could be well above the $4 threshold that seems to trigger a nationwide funk. If there's some kind of military showdown with Iran, panicky oil markets could send pump prices to $5 or even $6. And no stump speech or campaign promise is likely to assuage the indignities of aggrieved, overspent drivers.

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But Obama has more running room than that, and the fact that the elections take place several months from now could actually work out quite well for him.

At the moment, political pundits are hyperventilating over the disastrous effect that $4 or $5 gas could have on Obama's reelection campaign. But they're overlooking the usual dynamics of gas-price swings, which tend to occur like a sin wave, with every peak followed by a dip.

There's a saying among oil analysts: The best cure for high oil prices is high oil prices. That's because when rising prices cause enough pain, they tend to generate changes in behavior that bring prices back down again.

Drivers, for example, find more efficient ways to run errands, and some buy smaller cars that get better mileage. So they end up burning less gas. Governments mandate higher fuel economy, as the United States has done in recent years. Companies get more aggressive about controlling energy costs, with stronger incentives to streamline their supply chains, experiment with fossil-fuel alternatives and reduce their exposure to volatile energy costs.

Oil producers themselves contribute to the boom-bust nature of oil prices. As oil gets more expensive, costly extraction methods that may not have paid off before suddenly look more appealing. But more oil extraction boosts supply, which tends to push prices down. That's why some oil producers are reluctant to boost production when it appears that there's a shortage (but sometimes end up doing so anyway).

[See why $4 gas will hurt less this time.]

A quick look at historical gas prices shows this pattern in action. Gas prices first hit $4 per gallon in the United States in the summer of 2008, setting off a kind of automotive hysteria as the cost of getting around skyrocketed. But by the end of 2008, gas prices had plunged by nearly 60 percent, to about $1.75 per gallon. To be fair, that was a particularly manic swing, caused by a financial crisis and deep recession. But oil prices contributed to the downturn, and thus to their own decline.

There was a similar, though more restrained, pattern last year. Gas prices started 2011 at about $3.10, then peaked at just over $4 in May, as lost Libyan production and other aspects of the "Arab Spring" revolts raised fears of a supply squeeze. But pump prices fell gradually through the summer and fall, ending the year at an unremarkable $3.30 or so.

If the same trend were to hold this year, gas prices might peak over the summer, then decline to $3.50 or lower by Election Day. That could make gas prices a neutral factor that neither helps nor hurts Obama. If they fall by more, it could be a decisive advantage for the president. And the direction of gas prices in the month before Election Day probably matters a lot more than anything that happens earlier in the year.

Yes, it could be different this time. Gas prices have already risen by about 50 cents per gallon so far this year, as traders bid up the price of oil, largely on worries of a showdown over Iran's controversial nuclear program. Strikes on Iranian nuclear facilities could, in fact, lead to a battle over the Strait of Hormuz, a key oil chokepoint, or other scenarios that amateur strategists love to theorize about. Any real threat to the normal flow of oil could easily add another $50 or $100 per barrel to the price.

[See 6 things that could derail the economic rally.]

But the belligerent rhetoric coming out of Iran disguises the fact that the biggest loser in such a conflict would almost certainly be Iran itself. Its navy would probably end up decimated. If Iran seemed like the provocateur in a war over oil byways, it could end up as a pariah nation hard-pressed to sell oil to anybody, even China, its biggest customer. "Iran has more to lose from a cutoff of its oil than the world has to lose," says Mohsin Khan of the Peterson Institute for International Economics. "The world could adjust. Iran could not adjust."

It's also worth keeping in mind that Obama has some control over such events. He can't control what Iran does, obviously, but he has a decisive role in how the U.S. responds, and also in the conditions and timing that would be required for U.S. support, whether tacit or overt, of an Israeli attack. That doesn't mean Obama will be able to pull every lever in a way that optimizes his reelection odds. Some moves could backfire, while others might be less effective than expected. But it does mean the White House is unlikely to watch passively as soaring gas prices threaten a second Obama term.

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There are other factors that could push up oil and gas prices. If the global economy really took off, for instance, a surge in worldwide demand for oil might do the trick. But that, too, seems unlikely any time soon, since Europe is most likely in a recession and China's growth has slowed. It's also possible some unforeseen shock could upend the markets.

But the pundits predicting an Iranian war or some other dramatic event that would affect oil prices might also want to factor in plain old market dynamics. Sometimes, when the doomsayers are at full roar, nothing much happens. If the oil markets stay relatively calm for the rest of 2012, speculators and armchair warriors might end up disappointed—but Obama will be smiling.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success, to be published in May. Follow him on Twitter: @rickjnewman