For Obama, High Oil Prices Have a Green Lining

When gasoline prices go up, Presidential approval ratings historically go down. So the current occupant of the White House is offering sympathy to drivers suffering sticker shock at the pump and publicly ruminating about releasing oil from the nation's strategic reserves. "For Americans already facing tough times, it's an added burden," Barack Obama said at a Mar. 11 news conference.

Still, there's a silver lining in higher oil prices—or, rather, a green lining—for Obama, who has made clean energy one of his paramount causes. Rising fuel costs could go a long way toward advancing Obama's "Win the Future" vision of an economy remade by green technologies, including electric vehicles, advanced batteries, wind and solar power, and high-speed trains. "If you want to make people switch toward cleaner energy sources," says Nigel J. Gault (IHS), chief U.S. economist for IHS Global Insight, "you need to change the price incentives people are facing. One way to do that would be to make traditional energy much more expensive."

Take electric vehicles. Obama set a goal of putting 1 million on the road by 2015. Based on the $2.66 per gallon average price of unleaded regular gasoline at the beginning of last year, it would take 10 years to break even on the cost of an electric Nissan Leaf and home charging station, compared with a comparable gasoline-powered car. That's even factoring in federal tax breaks. The Leaf is a better deal now: At the $3.54 per gallon national average on Mar. 10, a typical car buyer would break even in seven years and save almost $6,000 over 12 years, according to Bloomberg New Energy Finance.

Truth be told, higher prices are what it takes to change the energy consumption habits of large numbers of Americans. "Somehow we have to figure out how to boost the price of gasoline to the levels in Europe," Energy Secretary Steven Chu told The Wall Street Journal in 2008 when he was director of the University of California's Lawrence Berkeley National Laboratory. Chu has backed away from that view since taking office.

Higher energy prices are precisely what Obama's proposed cap-and-trade legislation to control carbon emissions would have achieved. Had it passed Congress, the system of tradable permits would have raised the cost of carbon-generating fossil fuels, making clean energy sources more competitive. Unlike limits on carbon emissions, higher oil prices don't directly boost alternative power-generating technologies such as wind and solar energy. Oil is used to generate less than 1 percent of U.S. electricity, which is mostly produced by coal, natural gas, and nuclear energy. Still, over time, greater use of electric vehicles and hybrids could make a difference. "If you start substituting electricity for gasoline, it does transfer," says Martin Lagod, managing director of Firelake Capital Management, a $400 million clean-energy investment fund.

Only perceptions of a sustained change in gasoline prices will shift consumer car-buying habits. After all, the savings from driving an electric, hybrid, or fuel-efficient conventional automobile are spread over many years. The timing of this price surge early in the expansionary phase of the business cycle may be propitious, says Mark Zandi, chief economist at Moody's Analytics (MCO). It jolts consumers out of complacency after the recessionary ebb in oil prices. "The higher oil prices are, the more viable alternative energy and conservation efforts become," says Zandi, who predicts oil, trading at $97.98 on Mar. 16, will average $125 per barrel in five years. Obama made a similar point during the Mar. 11 news conference, arguing that the jump in prices provided new justification for his energy initiatives. "When prices go back down, we slip back into a trance. And then when prices go up, suddenly we're shocked," Obama said.

The White House is not overly concerned that the runup in oil prices to date will cause major damage to the economic recovery. The President's advisers are telling him a $10-a-barrel increase will cut between 0.2 percentage points and 0.3 percentage points from 2011's economic growth, a senior Administration official says. Since the 1970s, the nation has become much less vulnerable to oil price shocks as the economy shifts away from manufacturing and businesses become more energy efficient. Energy consumption per real dollar of U.S. gross domestic product is more than 8 percent lower than in 2005 when Hurricane Katrina disrupted supplies, according to the U.S Energy Information Agency.

That's not to say the White House is privately celebrating. Americans already are feeling pinched, and motorists are reminded of gas prices each time they fill their tanks. From Richard Nixon during the 1973 OPEC oil embargo to George W. Bush after Katrina, many a President has seen his popularity decline after sudden oil price jumps. Obama's own job approval, which had been rising since mid-December, reversed direction in early February and began declining as gas prices rose.

Mississippi Governor Haley Barbour, who is mulling a run for President in 2012, says Obama's policies "have been designed to drive up the cost of energy." That's not quite right. Three months before the last presidential election, Obama called for tapping the Strategic Petroleum Reserve to bring down gasoline prices, which had recently reached $4.11 a gallon. In the current price runup, Obama seems less willing to release oil from the reserve, but his hand may yet be forced. Obama the policy wonk understands the value of higher gasoline prices in curbing climate change and cleaning up the environment. Obama the politician appreciates the peril that high oil prices present to his standing with voters.

The bottom line: If Obama releases oil from the U.S. Strategic Petroleum Reserve, he may delay progress on his green energy goals.

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