Gas prices hit economy and Obama

Rising oil and gas prices are biting into the economic recovery, posing a threat to President Obama’s reelection effort in 2012.

The jump in gas prices, from around $3 to $3.50 per gallon, has led economists to lower their estimates of economic growth in 2011. The price increase will have a particularly negative impact on lower-middle-class consumers, who have less discretionary income to spare for fuel.

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“Right now it acts as a very pernicious tax increase,” said Mark Zandi, the chief economist for Moody’s Analytics who has advised both parties on the economy. “There’s nothing worse for our economy than a significant increase to our energy prices.”

He said the 50-cent jump in the price of gas could cost the U.S. economy $75 billion to $80 billion. Some of those losses will be offset by spending by the wealthy, who won’t curb their purchases because of higher gas prices. But a certain amount of impact will be felt.

There’s a good chance the jump in gas prices will be accelerated by the nuclear crisis in Japan, which is already causing unease in the global economy.

Stocks on Wall Street fell by triple digits Wednesday for a second straight day as the nuclear crisis took a turn for the worse. If Japan’s reactors cannot be controlled and radioactive material spews out, the consequences for the global economy and the U.S. will be severe.

While oil prices might drop initially as Japan’s economy slows, prices will rise if countries move away from nuclear power. German Chancellor Angela Merkel this week temporarily shut down seven of her country’s nuclear reactors to allow for a safety review. 

Oil and natural gas are likely to fill the gap in any countries moving away from nuclear power, increasing demand and price. 

This is bad news for a White House preparing to campaign in 2012.

The higher gas prices are already taking away momentum from the tax package the White House agreed to with Senate Republicans in December.

A key part of that package, from Obama’s perspective, was a 2 percentage point reduction in the payroll tax the White House hoped would serve as a second stimulus by putting more cash directly into workers’ paychecks.

Higher gas prices have negated that benefit, according to Zandi, who estimates two-thirds of the tax break has been taken up by higher gas prices. The rate could rise if prices move higher.

Martin Regalia, chief economist for the U.S. Chamber of Commerce, said the economy might be in worse shape without the payroll tax break, but acknowledged that the gas price increase will undercut much of its benefit.

“People can adjust and drive less,” he said, but still must drive themselves to work and drop their children off at school. Higher gas prices simply “cut into discretionary income,” he said.

Regalia predicts that if oil prices stay near $115 per barrel, the U.S. economy will continue to grow, but at a slower pace.

Zandi has lowered his forecast, from GDP growth of 3.9 percent to GDP growth of 3.5 percent. Two-tenths of a point comes from the higher gas prices, the other two-tenths from lower federal spending due to cuts by Congress.

Regalia suggests high fuel prices could keep the economy from biting away at the 8.9 percent jobless rate, which could even increase if growth slows.

The other reason stocks fell on Wednesday was the bugaboo of the U.S. economy: housing. Statistics released by the Department of Commerce showed new housing starts falling at their highest rate since 1994.

There is little the White House can do at this point but wait out the housing crisis. Until prices reach their equilibrium, values will fall, depressing consumer spending and the labor market.

If the worst is avoided at the Fukushima Daiichi nuclear power complex, U.S. companies and the economy could eventually benefit from Japan, where a fierce rebuilding effort will begin later this year.

Caterpillar saw its stock price fall on Tuesday, but the heavy machinery manufacturer should benefit along with producers of steel, concrete and other building materials later this year as Japan rebuilds its ravaged coast.

That could actually have a positive impact on job growth in the U.S. But if the higher fuel prices remain, the danger to the economy and Obama’s reelection effort will remain.

That’s one reason why Democrats are jumping on the Strategic Petroleum Reserve bandwagon.

Sen. Charles Schumer (D-N.Y.) on Wednesday said it’s time for Obama to open the reserve in order to lower gas prices.

Democratic leaders say the threat posed by gas prices to the fragile economic recovery is serious enough for the president to act. “I believe that the time is right,” said Schumer.

Obama has benefited from the economy in one way. He might not have won the presidency without the financial collapse of 2008, which seemed to wipe away any chance Sen. John McCain (R-Ariz.) had of winning the election.

Obama appeared cool and calm in the crisis compared to the Republican, who briefly suspended his campaign and came across as uncertain.

Those skills will be needed again this year as the president grapples with the pain of drivers paying higher prices at the pump.


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