RALEIGH – The most important number in American politics right now is the price of gasoline at the pump.
It’s more important than survey results about far-off presidential or congressional elections. It’s more important than the price of oil per barrel, which for most voters is an abstraction. It’s more important than unemployment or foreclosures, because while voters find rising rates worrisome, they correctly perceive their own risk of losing a job or home to be low. The price of gas is even more important than the price of bread or milk, because unlike grocery prices it is posted in big, illuminated numbers that motorists see daily even when they aren’t stopping to fill up.
The average $4 per gallon price of gas helps to explain a lot of today’s political trends. Some but not all of them reflect bad news for President Bush and his political party. Clearly, it’s a major factor pulling down Bush’s approval rating and pushing up the percentage of Americans who believe the country is on the wrong track. Both auger well for Democrats. However, $4 a gallon is also the major explanation for why Republicans welcomed a floor debate in the U.S. Senate this week on a proposed global-warming bill that would have further jacked up energy prices, and why Democrats changed the subject as quickly as they could. Measures to combat a projected risk from climatic changes over the next 50 years may be salable in theory, but not when the costs come into focus and consumers are already up in arms about their fuel costs.
Gas prices helped to explain why, here in North Carolina, there’s little sentiment in the General Assembly in favor of giving localities the ability to levy local gas taxes to fund infrastructure improvements. And it explains why most North Carolinians now favor an end to the prohibition against drilling for oil or natural gas off the Carolina coast, a prohibition that never made environmental sense and is now patently absurd.
Markets coordinate information through the price mechanism. Right now, the energy market is screaming through a large megaphone that worldwide consumers want more gasoline and diesel than is currently being produced. The logical response to this price signal is to bring more product to market, tapping oil fields and other sources that were not economical at the lower prices. Over time, if supply is allowed to catch up with demand, the world market price for oil will fall back down. But if governments artificially constrict supply, through unwarranted regulations or new taxes on producers, the market won’t equilibrate.
That’s the gradual-adjustment scenario. There’s actually a more optimistic take (or pessimistic, if like Obama and others you believe that higher gas prices are a good thing). Fortune editor Shawn Tully argued a few days ago that world oil prices could tank, not just diminish gradually over time, in a kind of energy-market echo of recent booms in housing and tech stocks. One reason is that some of the worldwide demand for oil is itself being artificially stimulated by price controls and other government policies in China, India, Malaysia, and other developing countries. Every time their consumers buy gas at subsidized prices well below what Americans are paying, their state-owned energy companies lose money. Faced with burgeoning budget deficits, many of these countries are starting to cut subsidies and decontrol prices, with predictable effects on demand.
Americans are reacting to higher gas prices in myriad ways. Sales of SUVs are down. Vacationers are taking shorter trips. And as voters, they are paying increased attention to government policies on energy and how they affect consumer prices. Good.
Hood is president of the John Locke Foundation.