Gas and Unemployment: Obama's Crucibles

Dan Henninger has a great column today in the WSJ, talking about what we are losing as a nation that is so deep and important yet so subtle as to be easily missed. I understand this, big time. But what struck me is Henninger's off-hand quip about some frightful green bureaucratic agency instituted in Barack Obama's second term. This may be wishful thinking on my part but I see serious obstacles to an Obama second term. Sticky wickets like North Korea and Tea Parties aside (which ought not be dismissed, as they represent a real and legitimate concern over the mismatch between what citizens want out of their government and what government wants for itself), I think the two principal barriers to Obama's re-election are going to be energy prices and unemployment. In my opinion, it is a better than 50% chance that the nation will go into the 2012 election cycle with $4+ per gal. gasoline, and 10+% unemployment. This is not mindless Obama=Jimmy Carter reductionism. Most analysts agree that crude prices are likely to jump in a few years as a return of demand will stress anemic supply growth. The bursting of the oil bubble since July 2008 has substantially reduced capital expenditures on oil and gas exploration, drilling rigs have been shut down at a staggering rate and energy companies are retrenching heavily. This is what one would expect to happen based on fundamentals, but as they say in the oil business, "low prices cure low prices" meaning this decline is eminently reversible. However this old maxim may not play out true to form this time around when you consider the policy obstacles that may prevent the natural self-correction of energy production. The policy environment is so hostile, and set to get worse, for energy producers in this country that their domestic exploration budgets won't come back even close to 2006-2007 levels until the anti-hydrocarbon attack is toned down substantially. Put simply, energy producers are hiding under their desks. If they are spending money, it is abroad. The domestic energy exploration business is going on an extended vacation. Any energy that is produced abroad is subject to competitive bidding by the Chinese and the Indians, whose economies will be consuming ever-greater amounts of crude oil. It is a virtual certainty that oil prices will rise by 2011, potenitally substantially. Here though is my less certain prediction (20% probability): gasoline prices over $4 during the heart of the election cycle will weigh on Obama in the polls and he will tap the Strategic Petroleum Reserve to mitigate high prices (e.g. save his ass).

The second obstacle for an Obama re-election will be unemployment. Let us here distinguish between the economy, the stock market and unemployment. The economy can be doing fairly well, as can the stock market, while employment can be in relatively bad shape. The Democrats drove home this point a few years back with their incessant lamentations of "jobless recovery." We can certainly have one. Looking at the landscape holisitically, the incentives for companies to invest in hiring US workers over the next couple of years are underwhelming. Companies are likely facing input cost inflation driven by cap-and-trade legislation that will drive up energy and compliance costs. They may face the prospect of advancing unionization made easy through card check legislation (see here for the real danger in this terrible idea). They face higher taxes on income earned abroad, taxes which their foreign competitors do not pay. They face potentially intense anti-trust scrutiny. They face head-on regulatory attacks on their industry (just ask the credit card industry). The upshot of all this is that US corporations will be struggling to maintain their level of profitability, and when they do contemplate growth the incentives are for them to invest in productivity tools rather than people or to invest in workers abroad rather than domestically. Trust me, China and Brazil want US corporations to build factories in their countries and they won't have anything like cap and trade to make potential investors think twice. It is a long shot to conceive of large corporations, companies whose hiring registers on the establishment survey, hiring aggressively soon after having near death experiences and facing this set of disincentives. Small businesses too will be under severe pressure from many of the same forces I noted and since the small businessman or woman is the last to get paid, they will be reluctant to divvy up their uncertain pie with more employees. So, my sense is that unemployment is almost certainly not going to approach 6% in Obama's first term. The best we can probably do over the next four years is 8% and even that may prove a struggle; but, it is a very real possibility that it will be at 10% when the mid-term congressional elections roll around, and depending on a few to-be-determined legislative outcomes , 10% unemployment could persist into 2011.

So if we contemplate gas over $4 and 10% unemployment in 2011, how do key Obama constituencies react? What do recent and soon-to-be college grads, who are disproportionate liberal voters, do? Do they entertain pocketbook issues or do they maintain a youthful idealogical posture? Hard to say exactly, but it's easy to imagine some slippage among this group if they can't find jobs. Businessmen? A large chunk of the business community went for Obama in 2008. Will they be there for him? With the exceptions of those who directly benefit from Obama's agenda (think subsidized green enegy outfits), this is the area where Obama has created the biggest risk of losing 2008 supporters. These are the obvious ones. Less obvious is private sector unions. Sure, Obama will pull out all the stops to help them, but what if his actions backfire? What if trying to hand the auto unions a leg up raises the cost of capital and hampers employment at other unionized shops (i.e. CAT)? Do the rank and file vote Obama's intentions or his results?

So while North Korea, SCOTUS nominee Sotomayor are grabbing the headlines, these could turn out to be tangential issues for Obama and for voters come 2012. President Obama has sown alot of risk into core, pocketbook issues for the next election. It will test his political abilities to the hilt to avoid reaping bitter fruits.