Who Wins and Loses
When Gas Prices Skyrocket?
The G.O.P. faces
voter wrath, consumers suffer,
and Big Oil hits a
A guide to the pain
By BILL SAPORITO,
Time Magazine, May 9, 2006 Issue, From the Web, May 16, 2006
It's not every day that Karl Rove
gets a lesson in politics. But the President's ace strategist was brought
up sharply at a recent White House meeting with a group of Republican
congressional-staff chiefs when he suggested that the best approach to soaring
gasoline prices was this: wait. There's no immediate fix available,
so let the market work its magic, Rove said. The stratospheric pricing
will reduce demand soon enough, and $3-per-gal. gas will be a memory by summer.
It's basic economics.
And, if you're a Republican politician facing a re-election challenge in
November, it's basic insanity. Rove should be the last person in America
to have to be told that textbook economics isn't taking the campaign trip this
summer with political reality. Not in a country where the right to drive
70 m.p.h. in a 55-m.p.h. zone while getting 15 m.p.g. is part of the national
vehicular patrimony. The voters are getting incensed every time they drop
$75 to fill their SUVs and pickups while oil companies tote up record earnings.
"What upsets me more than anything is the Democrats and Republicans keep
pointing fingers," says insurance salesman Bob Morris, 59, of Palestine, Texas,
whose weekly gas bill for his Camry has risen to $75. "Now I'm at the
point, whoever's in office, I'm ready to vote 'em out."
That's what horrifies the staff chiefs. Until now, Republicans consoled
themselves in this worsening political environment with the belief that
congressional elections are local popularity contests. Now that the
monthly price of driving to work rivals the mortgage payment, gasoline, more
than any other issue, could turn this election into a national referendum.
With the G.O.P.'s popularity gauge already down a couple of quarts, Rove was
told that if the White House didn't do something, anything, about energy costs,
Congress could put the President in the position of using his first veto to kill
a windfall-profits tax on oil-company earnings. Says a G.O.P. strategist:
"People just want the oil companies whacked."
So the Republicans turned on Big Oil, an industry they normally treat like a
good neighbor--or an ATM. In a particularly delicious bit of populist
sophistry, the party led by two oil guys that is pro-business, antitax and
antigovernment meddling was talking loudly about greedy petro-executives, IRS
audits of oil-company tax returns and withdrawing $2 billion in
industry-specific tax breaks over 10 years. That's about a month's worth
of profits for ExxonMobil, which announced quarterly earnings of $8.4 billion.
"Listen, we've got people like this that are working for a living, who are
paying higher prices for their gasoline -- it's like a tax," said President
George Bush, standing next to local resident Michael Wade at Fayard's service
station in Biloxi, Miss., where a gallon of regular sold for $2.96. "The
first thing is to make sure that nobody is getting cheated."
The President visited the service station to discuss a number of largely
ineffectual remedies for pulling down prices, some of which Rove had previously
discussed in the staff chiefs' meeting. Bush suspended additional
deliveries to the Strategic Petroleum Reserve to divert that crude to the
market. He called for more tax incentives for hybrid cars, fewer
environmental hurdles for refinery builders, drilling wells in the Arctic and
congressional authority to raise mileage requirements on cars. Senate
majority leader Bill Frist, who earlier in the week had advised voters to drive
slower and get a tune-up, was fronting a Republican proposal to send a $100
rebate to most taxpayers -- which they could return to the oil companies next
time they filled up.
Handed the issue that could win back the House, congressional Democrats steered
en masse to service stations, like NASCAR drivers pitting for gas.
Following a carefully strategized plan of photo ops organized by the Democratic
Congressional Campaign Committee, they staged press conferences in filling
stations around the U.S. to denounce the Republicans and promote their equally
ineffectual solutions. Said John Cranley, who posed near a price sign at a
service station in Cincinnati, Ohio: "These gas prices represent the
failure of my opponent, Steve Chabot, and George Bush to fight for the middle
class. The Republicans and Steve Chabot are giving [Big Oil] $14 billion
in your money." The Democratic handout proposal was even more generous.
The Dems want to rescind the gasoline tax for a while--which would stimulate
The fallout from gasoline prices was doubly painful for the G.O.P. because it
obliterated the good news that the economy is absolutely cranking. Federal
Reserve chief Ben Bernanke estimated that the economy grew nearly 5% in the
first quarter, while unemployment has fallen to 4.7%, the lowest since 2001.
But the price of gas isn't a mere macroeconomic figure. It's a pocketbook
item that consumers feel every week. The economy required about 27% less
energy to produce a dollar of GDP last year than it did in 1986, according to
the Department of Energy. But gas prices are hurting consumers because
real wage growth has declined over the past four years. The American
Automobile Association estimated that the average driver's fuel costs will
increase to 9.2˘ a mile, from 8.2˘. Not academic, since the average
commuter covers more than 8,000 miles a year just getting to work and back.
If high energy prices are hurting workers, they are devastating a number of
industries, most notably the airlines. Already buffeted by bankruptcies
and labor disputes, the major carriers had made steady progress in shedding
excess capacity and lowering labor costs. As a result, jets are fuller.
But the till is still empty. Every dollar increase in the price of a
barrel of oil translates into a $365 million immediate increase in fuel costs
for the 11 major airlines. Even hyperefficient JetBlue has gone into the
red. "High oil prices and continued losses will probably be a slow grind
to liquidation for some airlines," says Vaughn Cordle, the founder of the
analytical firm AirlineForecasts. While some airlines thought they might
break even this year, now the biggest carriers may lose as much as $3.5 billion
in 2006, Cordle predicts. If the current jet-fuel prices hold, something
else will have to give. Result? Look for more mergers and higher
The spike in gas prices is the last thing Detroit needs now, especially General
Motors, which had been banking on the launch of redesigned, full-size SUVs like
the Chevy Tahoe, GMC Yukon and Cadillac Escalade to help boost sales this year.
A few years ago, automakers could count on a core group of 1.5 million
households to buy full-size SUVs, according to Art Spinella, president of CNW
Marketing Research. Even before this year, higher gas prices had eroded
that market. Only about 700,000 U.S. households are now in the market for
full-size models. That's why automakers are switching to crossover
vehicles like GM's Pontiac Torrent and Ford's Ecosport.
Oil-dependent industries that had been absorbing higher costs are also beginning
to suffer. Consider the chemical industry, which needs petroleum as a
feedstock, or raw material, for such products as polyvinyl chloride (for plastic
pipe) and polyethylene terephthalate (for soda bottles). "You see the
biggest impact across the board in plastics," says Morningstar analyst Sumit
Desai. Back in 2003, hydrocarbon feedstocks and energy accounted for 36% of Dow
Chemical's total costs. Last year they ate up 47% of total costs, yet the
company still managed an earnings increase. But Dow reported this week
that first-quarter net income fell 10% from a year ago, to $1.21 billion,
despite a 3% growth in revenue, which hit $12 billion. Dow's net income
dropped mostly because the cost of energy and oil-derived raw materials
increased more than $800 million in the quarter. One way chemical
companies are dealing with rising energy costs is to move production overseas,
particularly to the Middle East, where they pay less for energy. Dow is
one of the companies doing that, putting U.S. plants in jeopardy.
Economists are worried that companies are reaching the limit of being able to
transfer energy-price increases to their customers in the form of surcharges.
FedEx just raised its fuel surcharge on air deliveries from 12% to 13.5%.
Even local pizza parlors, which have been adding a dollar or two to the bill,
will reach the push-back point if the upward trend continues. "The pain at
the pump this summer is going to be on truckers, taxi drivers, limo drivers,
airlines, shipping companies. The question is, Do they pass it on?" says
Joe Stanislaw, an independent energy adviser for clients of Deloitte & Touche.
Not everyone is unhappy with high oil prices. Besides oil companies, these
are boom times for oil-field-service firms like Schlumberger, whose oil-field
revenue is up 34% over last year's first quarter, and high-tech equipment makers
like Baker Hughes (up 89%). Rig activity is so strong and demand for
energy services so unprecedented, according to Dave Lesar, CEO of Halliburton
Co., the Vice President's former outfit, that the oil-field-service conglomerate
started raising prices this month. So have others. Oil-drilling
ships are renting for $500,000 a day, double the charge of 18 months ago.
"The price of oil is a transfer of wealth from the consumers to the producers,"
says Brian Gambill, senior analyst of Manning & Napier Advisors, an investment
firm. "And the producers transfer their wealth to the oil-service
companies because they don't have many of the technological capabilities that
the service companies have."
That's good news too for oil workers, petroleum engineers and geologists, as
even fields once thought tapped out are getting attention. Sites like
oilfieldworkers.com are touting jobs for $100 a day, with no experience needed.
Is gushing oil too icky for you? Hate living in camps outdoors? Oil
companies are looking for cooks and medics too, say the ads. At oilfield
jobs ok.com the come-on is for 700 jobs in Oklahoma, paying $20,000 to $60,000,
with benefits, flex hours and job training. "Great opportunities for
hardworking guys like you!" says the ad.
Oil has also been a great opportunity for hardworking guys who run countries
that are on less than chummy terms with the U.S. Hugo Chávez and Mahmoud
Ahmadinejad, the Presidents of Venezuela and Iran, respectively, have benefited
from the rhetoric of U.S. foreign policy. The Administration's
confrontational response to Iran's nuclear policy and Venezuela's anticapitalism
is actually making those countries richer and their rulers more popular by
driving up the price of oil, a commodity they possess much of. In
Venezuela the self-proclaimed Bolivarian revolutionary Chávez has taken state
control of some oil fields and threatened ExxonMobil and other oil companies
with raising royalty payments and lowering their partnership interests.
When oil traders in New York City's Mercantile Exchange hear Iran threaten to
stop pumping in a market that is already tight, they immediately bid up the
price of contracts for future oil delivery. That cycle of fear isn't the
only thing sending prices higher. Hedge funds, sniffing profits, are
pouring money into oil and other commodities. The chase has added $10 to
$15 to the price of a barrel of oil, say economists. Nor do the
fundamentals of global oil offer much hope for lower prices over the long run.
The growth in demand is exceeding the growth of supply by 400,000 bbl. a day,
fed by the rapidly expanding Chinese and Indian economies.
Americans, however, are the original gas hogs. The U.S. uses more oil per
day than any other country -- 4.5% of the world's population guzzling 25% of the
planet's petroleum output. But voters viscerally blame their
petrodependency on the man and the party in charge. In a recent CNN/
Gallup poll, 75% of those surveyed said a President could control oil prices;
71% said this President wasn't doing enough to bring them down.
Conversely, many analysts argue that the best way to create new energy sources
and encourage conservation is to raise gasoline prices, not lower them.
Fadel Gheit, senior energy analyst with Oppenheimer & Co., defends Exxon Mobil
while blasting politicians and consumers. "We're a bunch of crybabies.
They pay the equivalent of $6 a gallon for gas in Germany," he says. But
with elections looming and consumers fuming, the Republicans can't ignore what
every TV news show is headlining the Pain at the Pump. The cost of gas may
be high now, but for the Republicans by November, it could be a lot higher.
—With reporting by Unmesh Kher, Daren Fonda, SALLY B.
DONNELLY, Cathy Booth Thomas/ Dallas, Reported by Mike Allen, Karen Tumulty/
Washington, Jens Erik Gould/ Caracas, Marc Hequet/ St. Paul Minn., Dody Tsiantar/