Monday, February 28, 2011

Political Risk: What Higher Gasoline Prices Mean for U.S. Legislation

Higher gasoline prices are starting to put pressure on consumers just as many people are starting to feel better about the economy. What does this mean for the near future relative to new energy legislation? For now, prices aren't high enough to warrant serious concern, but keep your eyes on the horizon.

Higher energy prices impose an effective “tax” on households and businesses, leaving fewer funds available for spending and investment.
This poses a threat to the current recovery and could significantly set back an improving labor market. Higher prices also impact headline inflation (inflation measures the rate of change of prices, not their level). Politicians, especially Democrats, hate news about unemployment and inflation. This means the oil and gas sector is a prime target for Democrats' legislative efforts, especially in light of the ever-closer presidential election. It also explains why the Obama administration has come back four times with proposals for new taxes on the industry. Since most consumers have no clue about the relationship between oil and gasoline prices (the "gas crack") we are an easy target.

Many analysts believe that gas prices would probably have to stay closer to four dollars per gallon to create sufficient political pressure to force Congressional action. Never mind the fact that there is little Congress can actually do to impact the price of gasoline (besides increase it by imposing even more taxes). Nonetheless, high gas prices create political pressure to be seen as "doing something."

The rumbling has already begun.

Last week Senate Democrats called for Obama to release the Strategic Petroleum Reserve to help drive oil prices lower, though it's unlikely he will do so at current prices. Democrats will also demand an FTC investigation of price manipulation (blaming increases on some sort of cabal). Expect these types of proposals to increase in frequency (and volume) as we near the next presidential election cycle.

In the near future, Republicans will continue to pressure the Obama administration to force BOEMRE to change its behavior (which has virtually stopped new drilling in GOM). Interior Secretary Ken Salazar testifies before Congress tomorrow and could announce that a few permits will be forthcoming. However, even if BOEMRE relaxed the standards for permits, the resulting new production would represent a drop in the bucket of world oil supply and have little, if any, short-term impact on prices.

As prices increase further, there will be more calls for an energy bill. This means another bite at the apple for Democrats; another opportunity to use the industry as a whipping post and an excuse for new taxes and new regulations.

Brace yourself.

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