woody_zimmerman_118_2007This will not be an economic analysis. I lack the credentials for that. Besides, even credentialed economists can’t agree on where we are headed, so there seems little point in adding to that mish-mash of opinions and “prostituted” analysis. I use this loaded term to reflect the truism that economists in the pay of the government – especially employed by the Obama administration – are almost certain to shape their prognostications to line up with the policies of their masters. Theirs are not trustworthy predictions.

My analytical “tool” – such as it is – is simply the historical record. The situation in which we find ourselves is quite reminiscent of previous periods. Let’s review a few fairly recent examples. On that basis, let’s see if we can predict where our economic ship is headed.

1974. Following the 1973 Gaza war between Israel and Egypt (as well as other Arab nations in the region), America suffered its first “oil shock” of the 20th century. In early 1974, oil tripled in price, from $3 to $10 a barrel, sending gas from 30¢ to 50¢ a gallon. This was bad enough, but government added to the problem by trying to control supply allocations to various regions of the country. Some states had ample supplies. Others – like the DC Metro area – had a shortage, leading to long lines at gas stations, curtailed station-hours, and a form of rationing in which your license plate number determined which day (even or odd number) you could fill up with gas.

Not surprisingly, this infuriated consumers. Actual fisticuffs broke out in some gas lines when drivers attempted to cut into the head of the line. I don’t recall anyone getting hurt, but police were called to quell several donnybrooks. The natives were definitely restless (and not only at night). I recall lining up at one service station before work to fill up my car. The station opened at a known time, and we were there before that to get an early place in the line.

At the time, labor unions were much stronger than they are today. Some unions negotiated new contracts that raised wages to compensate for increased gas prices. Stores raised prices, too, and soon inflation was “galloping” upward at a rapid rate. The 1970s had one of the highest inflation rates in our history (see “Inflation Then and Now;” Woody Zimmerman; AHH, May 30, 2006). According to official federal government data, inflation jumped from 6.2% in 1973 to 11% in 1974.

At the same time, the country fell into a deep slump on account of the reduction in consumers’ spending due to the higher gas prices. There is only so much discretionary consumer money. If more of that money goes for gas, other less critical items will not be bought. Unemployment leapt upward from 4.9% in 1973 to 5.6% in 1974, and to 8.5% in 1975. All this was not lost on either voters or politicians.

With the economy in the crusher from high gas prices, recession and inflation, President Nixon’s popularity suffered significantly. The double whammy for him was that Democrats pushed the Watergate burglary to the fore, after it had sat dormant for two years. Suddenly, Richard Nixon was on the ropes. Hearings began in the House of Representatives on impeachment proceedings.

By August Mr. Nixon was forced from office (for the “good of the country”). The conventional wisdom is that the Watergate incident brought him down. In part, that is true. But from this observer’s vantage-point, it seemed obvious that the economy drove the entire thing. Until gas zoomed up, boosted inflation and crippled the economy, Watergate was nothing. It got critical traction only when voters became really unhappy with conditions. High gas prices sank Richard Nixon’s presidency. (World according to me.)

1979. The deposition of the Shah of Iran and the Islamic Revolution in that country caused a disruption in oil supplies that pushed prices to an all-time high of nearly $40 a barrel. The price had been $15 a barrel, just months before. Supply shortages brought back the gas-lines of 1974. Some stations opened for only a few hours a day. I can recall meeting the attendant of our neighborhood station behind the building, when they were closed, to buy a gallon of gas so I could mow the grass. The government actually printed gas-rationing coupons, but they were never issued. People were really upset.

Just like in 1974, the economy slowed significantly from the oil shock, and inflation took off, jumping to 11% in 1979, and nearly 14% in 1980. Unemployment began to move upward too. Fed Chairman Paul Volcker, appointed in 1979, decided to fight inflation by raising interest rates. By 1980, we had 18% mortgages, and we still had 14% inflation. The economy went completely into the tank. Republican presidential candidate Ronald Reagan publicized the “misery index” – a statistic that equaled the sum of the unemployment rate, the inflation rate, and the prime interest rate. By the end of the Carter administration, that unofficial “index” reached levels never recorded before or since.

Along with all this, personnel from the U. S. Embassy in Teheran were taken hostage in November 1979, and held until Inauguration Day, 1981 – a total of 444 days. The ensuing year of failed negotiations and a dramatic, failed rescue attempt in the desert – followed by the disgusting, highly publicized mutilation of the bodies of U. S. troops killed in the attempt – destroyed whatever popularity President Jimmy Carter might have had. He was disastrously defeated by Mr. Reagan in the 1980 elections. Oil had knocked over another American president.

2008. In the wake of the dramatic bank crashes and financial crisis of the fall of 2008, it’s easy to forget that oil soared up to $147 a barrel by mid-summer. Gas was selling at the pump for over $4 a gallon.

The soaring prices were finally arrested when the Congress passed legislation that enabled off-shore drilling. By October, oil had fallen to $70 a barrel, but the damage had been done. As the economy sank into recession, unemployment soared, reaching 9.3% in early 2009. The crash of the financial industry finished off whatever chance Republican candidate John McCain had of defeating Barack Obama. (Until the financial collapse, Mr. McCain was actually leading Mr. Obama in some polls.)

Barack Obama swept on to a decisive victory in the November elections. Essentially, voters were voting against George W. Bush, who was not running. Mr. McCain took the hit for the economic wreckage that came on Mr. Bush’s watch. Again, oil prices drove the recession and turned voters decisively against the sitting president. It always works that way.

2012. In view of that abbreviated history, what can we expect in the election-year of 2012? Right now, the signs and portents are not good for Mr. Obama. Oil futures are selling for $112 a barrel, and rising; gas is selling at the pump for $3.88 a gallon. Some forecasters predict oil surpassing its 2008 high of $147, with a few even predicting $200 a barrel by late summer. Others see the increase slowing and the price sinking back a little, with gas dropping to perhaps $3.50 a gallon. This would be better than $5 or $6 a gallon, of course, but high-level economists – who, like the president, ride in limousines and don’t fill up their own cars – might be miscalculating the effect that even $3.50-per-gallon gas has on consumers. Many are paying $60 or even $80 to fill their tanks. That does hit you in the gut – especially if you can recall, as I do, when three or four bucks would fill your tank.

Whether he fills his own tank or not, Mr. Obama and his inner circle know that he will take the hit for these high prices in 2012. And gas prices are not his main worry. For months, Mr. Obama has been preaching the Gospel of Recovery to the country, maintaining that things were improving, unemployment was decreasing, and “prosperity was just around the corner.” Often these speeches are made at factories which produce “green cars” and other subsidized products favored by Mr. Obama. Business might be good there, but is less so in other parts of the economy.

To some extent, unemployment rates are falling because many unemployed people are discouraged about finding work and are withdrawing from the work-seeking population. This eliminates them from the numerator and the denominator of the fraction called the “unemployment rate.” Arithmetically, that rate must decrease as those people disappear from the calculation. (Try subtracting 1 from numerator and denominator of any fraction – note the decreasing value.) The resulting small drops in the unemployment rate are regularly celebrated by Obama administration officials, but the country as a whole understands that things are not really getting better.

Mr. Obama knows there is danger here, so he is running around the country damning Big Oil and oil “speculators” – as though the latter were actually doing something nefarious to drive up the price of oil. They are merely doing their business the way it should be done, reacting to conditions and prospects in their bids on future prices.

Republicans have rightly counter-attacked, arguing that Mr. Obama’s comprehensive drilling moratorium stands in the way of a boost in oil-supply that would push the price of oil down on world markets. Mr. Obama tells all who will listen that “there is no silver bullet or quick fix.” But much of the public now comprehends that futures markets respond to perceptions as much as to realities – perhaps even more to the former. Even the prospect of more supply, in due time, would keep traders from bidding up futures, and compel them to recognize that new supplies will eventually drive the price back down.

My estimate is that if the price of oil keeps on climbing – to $125 a barrel or more – the effect on the economy will be disastrous. By late 2011 or early 2012, we could be headed into a double-dip recession, with unemployment rates climbing. History teaches that this will sink any presidency. It may be a steep price to pay to oust Mr. Obama, but it might be the only tool available.

At the same time, the Obama government intends to inflate the currency by printing more dollars. This is being openly discussed. This is the precise definition of inflation – i.e., more dollars chasing the same goods. Naturally, prices will rise as a result. Thus, another component of the “misery index” will be on its way up. Mr. Obama has a silver tongue, but maybe not enough to get him out of this mess.

If we elect this guy a second time, we’re going to deserve everything we get. I don’t want to hear any complaining if that happens. Just shut up and take your medicine. The Doctor knows best. We’ll all go together, when we go…