Argument

Not-So-Super Tuesday

The real winner of the Republican primary is Barack Obama.

"No one ever gains votes in a national election by going through the presidential primaries," Bill Clinton remarked ruefully in 1992. "They're designed to chew you up and spit you out."

That maxim has never been more apt than during this Republican primary season. As Mitt Romney and Rick Santorum do battle this Super Tuesday, March 6, they have dug themselves ever farther into the mire of a hard-line conservatism that is woefully out of step with America's changing electorate. No matter who wins on Super Tuesday, the Republican Party will have a huge problem expanding beyond its base and forging a winning coalition.

Start with Hispanics -- who accounted for 55 percent of population growth in the last decade -- and the immigration issue. Romney, who is typically viewed as the "moderate" in the race, has been aggressively conservative in this area in an effort to outflank his more ideological opponents. He has promised to veto the DREAM Act, which would provide a path to citizenship for illegal aliens who came to the United States as minors with their parents, opposes in-state college tuition for illegal immigrants, and raised a much-mocked scheme for their "self-deportation." More generally, he has consistently sneered at any sign of softness among his primary opponents on these issues, raising the specter of an increasing flood of illegal immigrants coddled by the law and provided with benefits they don't deserve.

No wonder Hispanics, despite the bad economy and concerns about the level of deportations on President Barack Obama's watch, are supporting the president at levels above those he received in 2008, when 67 percent voted for him, compared with 31 percent for John McCain. Indeed, a just-released Fox News poll -- not usually considered a Democrat-friendly source -- has Obama garnering 70 percent of the Latino vote, compared with just 14 percent for his closest Republican opponent, an incredible 5-1 ratio.

Given Obama's expected high support from African-American voters, this suggests that the president could certainly match his 80 percent overall support from minority voters in 2008. If that comes true, he has huge leeway to lose white votes. Amazingly, he could approach the levels at which congressional Democrats lost the white working class (30 points) and white college graduates (19 points) in the wipeout 2010 midterm election and still win the popular vote.

That's not a high bar, and right now it looks like Obama will clear it with ease. In fact, it looks like the president could approach, and perhaps exceed, his 2008 performance among these voters.

Part of the reason for this is the virulent strand of social conservatism, on issues ranging from same-sex marriage to abortion to contraception, on display in the Republican primaries. The differences among the Republican candidates, with the sole exception of Ron Paul, are minor -- and well to the right of the American public. The latest manifestation is the candidates' uniform backing for the Blunt amendment, which would have allowed any employer to opt out of providing birth control coverage for "moral" reasons. That has been accompanied, of course, by the embarrassing spectacle of conservative commentator Rush Limbaugh denouncing a Georgetown University law student as a "slut" for testifying in favor of birth control coverage.

This hasn't gone over well with voters, especially white, college-educated voters, who tend to be relatively liberal on these issues. And it may be one reason that Romney's appeal among these voters -- despite his so-called moderate views -- may be evaporating. Recent polls show him running at about where McCain did with this group in the 2008 presidential election (a modest 4-point margin) and sometimes worse.

Even more terrifying for the Republican Party, Romney appears incapable of capturing the large margins among white working-class voters that Republican candidates need in order to win a general election. In a just-released NBC poll, Romney's margin among these voters was a mere 5 points, far less than McCain's 18-point margin in 2008 and less still than the 25 points or more Romney probably would need in order to win, given the United States' shifting demographics.

Romney's wealth and general cluelessness about ordinary workers' lives -- his latest gaffes include saying that his wife drives "a couple of Cadillacs" and admitting that though he does not follow NASCAR, he has "some great friends who are NASCAR team owners" -- may make him a particularly poor standard-bearer for this demographic. The Republican candidates, however, also all subscribe to a range of positions -- opposition to the auto-industry bailout, opposition to raising taxes on the rich, support for Rep. Paul Ryan's unpopular Medicare "reform" plan, and support for attacks on collective bargaining -- that do not endear them to these voters. Again, the primary process has brought these positions forcefully to voters' attention.

All this -- combined, of course, with the improving economy -- spells big trouble for the Republican nominee, no matter who he is. That doesn't mean the candidate who gets the nomination is doomed to lose, but it does mean that candidate is likely to pay a significant price for the Republican Party's refusal to compromise its ideology in the face of a changing electorate.

In a sufficiently bad economy, perhaps that price wouldn't have mattered. One suspects that relying on a stagnant economy was always Plan A for the Republicans, especially Romney. But now, with the economy on the upswing, Plan A doesn't look so good. And Plan B? If there ever was one, the Republican primary process has killed it off.

Justin Sullivan/Getty Images

Argument

The Petrostates of America

Yes, the U.S. economy is addicted to oil -- selling it.

The United States now faces a daunting challenge: The world's crude oil supply has been flat for years, even as emerging economies demand ever greater quantities. To prosper in this environment, the United States will have to make progress in using fuel more efficiently faster than emerging economies can bid away the oil supply. All of which raises the question: Can we live without oil?

To arrive at an answer, we should start in April 2011, when the global economy suffered an oil shortage in the wake of the uprising in Libya and the price of Brent crude, one of four benchmark varieties traded internationally, soared to $123 a barrel. It was a sharp rise, but not entirely unheralded. While oil had averaged $70 to $80 for most of 2010, prices had begun moving up in October of that year as economic recovery lifted demand. Brent crested the $100 mark in February 2011, just as the Arab Spring was beginning to take shape. Two months later, as unrest swept through the Arab world and Libya exploded into civil war, prices reached levels historically associated with oil shocks in advanced economies. At the time, our firm, Douglas-Westwood, warned of heightened risk of recessions by late in the year.

Our forecast held in the case of Europe, which is now in or close to recession. True, this is largely due to the lingering effects of the financial crisis. But Italy, for example, is reeling more from a lack of growth than either fiscal profligacy or excessive debt. And oil prices have surely played a role in stunting growth, starving the country of the resources to repay its financial obligations.

But we were wrong in the case of the United States, which did not succumb to high oil prices, though the situation remained dicey throughout the summer and early fall. The Dow Jones industrial average shed 1,000 points during the summer, and the Occupy Wall Street movement seized Zuccotti Park in New York City, spawning offshoots throughout the country. Negotiations to raise the debt ceiling looked parlous, and the economy threatened to unravel. But, crucially, it didn't.

Instead, as Greeks took to the streets and bond vigilantes assaulted Italy, Spain, and even France, U.S. stock markets began a gradual recovery, and GDP growth stabilized, reaching 3 percent in the fourth quarter of 2011.

Curiously, this growth came as Americans consumed less and less oil. U.S. oil consumption peaked for the post-recession period in July 2010, when oil cost $75 a barrel. When Brent hit $95 eight months later, in March 2011, demand was falling in earnest. By January of this year, oil consumption was 4.7 percent lower than at the same time a year earlier and was back at levels last seen at the trough of oil demand during the worst of the recession. In fact, January 2012 proved to be the third-weakest month for U.S. oil consumption since 1997.

U.S. Consumption, U.S. Average Import Oil Price


Source: U.S. Energy Information Administration, barchart.com, Douglas-Westwood analysis

Falling oil consumption is rare and, in the absence of recession, almost unprecedented. In fact, the United States has only experienced declining oil consumption without an accompanying recession once -- during a 12-month period from 1980 to 1981. In every other instance -- 1973, 1979, 1981, 1990, 2001, and 2008 -- a fall in oil use has gone hand in hand with recession. And, in each case but 2001, rising oil prices were implicated as a cause of the economic slowdown. Oil use is linked to recession through what economists calls the inelasticity of demand, which holds that consumers will resist reducing oil consumption even if prices rise and will only adjust their behavior when forced to do so by a brutal recession.

But not this time.

Why or how the U.S. economy has improved its capability to respond to high oil prices is not well understood. One theory suggests that improvements in fuel efficiency are achieved during the recovery, not during the recession. Thus, when the economy collapses, businesses and consumers lack the capital or economic incentive to invest in more fuel-efficient equipment. During the recovery, however, the prospect of demand growth and increased incomes encourages the acquisition of more fuel-efficient assets. The structural changes in the economy, in other words, occur during the recovery, when the economy is better positioned to replace assets. 

To an extent, this theory is consistent with what we witnessed in the aftermath of the 1973 and 1979 oil shocks, when Americans dumped Detroit's gas guzzlers and bought Japanese compacts. But these historical periods are not entirely analogous to the current situation. U.S. oil consumption increased once the 1973 oil shock subsided. And in 1979, Saudi Arabia tried to prop up prices through continuous production cuts, which caused global production to fall by over 6 million barrels per day (mbpd) from 1980 to 1983. Today, by contrast, the oil supply has risen by 3 mbpd since 2008, if we include biofuels and natural gas liquids. But this growth is not nearly robust enough to satisfy the needs of both advanced and developing countries, with the result that oil prices are increasing as emerging countries like China cut into America's oil supply.

Unless the oil supply increases much faster than it has in recent years, U.S. prosperity will fundamentally depend on increasing fuel efficiency. Until 2011, the United States' efficiency progress was abysmal. Measured as the ratio of real GDP to oil consumption, efficiency was only 1.5 percent higher in 2010 than in 2008. Historically, even in the absence of high oil prices, the country's oil efficiency normally improves by 1.2 percent per year. Under the pressure of high oil prices, the rate of change should be even greater -- as much as 2 percent per year. But in the two years following the Great Recession, oil efficiency barely budged.

Oil Efficiency in GDP (2008 = 100)

Source: U.S. Energy Information Administration, U.S. Transportation Department, Douglas-Westwood analysis

Then, in late 2010, the outlook brightened. Oil efficiency started to improve and accelerated following last April's oil shock, ending 2011 up 3.7 percent, or nearly twice the pace previously considered attainable. Rather than falling into recession, the U.S. economy responded to high oil prices by using energy more efficiently -- and at a healthy clip.

And it shows in new vehicle purchases. According to the University of Michigan's Transportation Research Institute, consumers purchased vehicles with an average of 23 miles per gallon (mpg) in January -- 0.8 mpg better than the average in December. The change represented the highest monthly increase since the institute began tracking fuel economy in 2007.

Index of U.S. Transportation Fuel Efficiency and Vehicle Miles Traveled (2008 = 100)

Source: U.S. Energy Information Administration, Douglas-Westwood analysis

The Transportation Research Institute also notes that average fuel economy was up 0.5 mpg for new vehicles purchased in January compared with a year earlier, and it was up a hefty 2.5 mpg -- an increase of 12 percent -- since 2007. Consumers, in other words, are beginning to respond to high oil prices by modifying their purchasing behavior, and the pace of change has been accelerating. But people are not necessarily getting back in their cars; fuel economy improvements have not been accompanied by a commensurate increase in driving.

More broadly, the statistics speak to more efficient oil use across an economy whose structure is changing as we speak. New businesses and forms of social interaction have emerged during the recovery that, by definition, are more compatible with higher oil prices. Some of these -- such as e-commerce and social networking -- are piggybacking on earlier trends. But perhaps no sector has been as transformed by high energy prices as the fossil fuels industry itself, which is experiencing a boom without precedent in the last 30 years. In 2011, the United States increased its crude oil production by a greater volume than any other country, including Brazil, Canada, and the entirety of OPEC, fueling a hiring rush from Houston to North Dakota. New techniques such as hydrofracking and horizontal drilling in shale have stoked natural gas production, reducing energy costs by an amount equal to $1,400 per household and bolstering the struggling economies of rural Ohio and Pennsylvania. Oil and gas production have contributed materially to the growth of the U.S. economy as a whole.

In aggregate then, the U.S. economy is beginning to respond to high oil prices on both the demand and supply sides. On the demand side, the country has ramped up investment in fuel-efficient assets, including fuel-sipping vehicles. On the supply side, the United States is producing more oil -- from the Bakken shale formation beneath Montana, North Dakota, and Saskatchewan in the near term and from resumed drilling in the Gulf of Mexico and Alaska over time.

But we are running a marathon, not a sprint. To make room in the oil markets for a thirsty China, our analysis suggests that the United States must cut oil consumption at an annual pace of 1.5 percent for the next decade at least. If the country is able to maintain the oil-efficiency growth of 3.7 percent that it achieved in 2011, then GDP growth should reach a tolerable 2.2 percent per annum. But if the rapid pace of efficiency improvements flags, GDP growth will struggle. Economic growth will also stumble if shale oil and gas production -- two of the rare bright spots in the U.S. economy in the last two years -- sputters.

We have seen this race between efficiency and scarcity in other sectors such as agriculture. Poor countries are facing ever-increasing food costs and accompanying social unrest as China's citizens eat more and more grain-intensive foods. Oil price pressures are manifesting themselves as social unrest as well, from the Arab Spring to Occupy Wall Street. But the key difference is that while agricultural output can still be expanded, the crude oil supply hasn't budged in the last five years.

So, can Americans live without oil? Or, more precisely, can the United States prosper and reduce its oil consumption at the same time? In the second half of 2011, it briefly did. The U.S. economy responded to a structural scarcity of oil by retooling for a world where it has to share finite resources with an emerging China. America's addiction to oil consumption may not be broken, but its grip on the country is loosening. At the same time, America's addiction to oil production may be growing. Ultimately, if Americans want to grow the economy, they will need oil -- if not to consume, then to produce.

Ki Price/AFP/Getty Images