The Cost of Oil & Gas

History does not often repeat but it does tend to rhyme. On February 28, the United States and Israel launched an attack against Iran. In response, Iran has retaliated with large scale attacks against US bases and infrastructure in the region and has also made it extremely difficult for cargo ships to transit the Strait of Hormuz.

 

The Strait of Hormuz is a critical waterway in the Middle East in which 20% of the world’s oil and gas passes through in addition to other products like helium used in the manufacturing of semiconductors and fertilizer used in the production of agricultural products. Iran’s closing of the strait has had major implications for not only the United States but also for the rest of the world. Many political and economic pundits are assessing the long-term implications of this conflict. However, we can use history as a guide to foresee not only the effects this conflict could have on the economy but also the effects this conflict could have on the political landscape as we approach midterm elections.

 

1970s Energy Crisis

 

On October 6, 1973, Egypt and Syria initiated the fourth Arab-Israeli war, called the Yom Kippur War, and attacked Israel. The conflict only lasted 20 days but would draw the United States and the Soviet Union into the battle and settlement negotiations. When the United States started to re-supply Israel with weapons in the conflict, Arab members of OPEC, the organization formed in 1960 to stabilize oil and gas markets and coordinate oil and gas polices, enacted an oil and gas embargo on the United States.

 

Americans quickly felt the pinch at home. President Richard Nixon started to ration oil reserves which created long lines at the pump. Coupled with economic stagflation, a period of stagnant growth characterized by high inflation and high unemployment, consumer confidence in the United States dwindled significantly. The oil embargo would end five months later but its effects would last well into the decade. The current war is not even a month old, and already we can see many parallels to the 1970s. In the past month the price of crude oil has gone up 35% and the war currently has no end in sight. Already, America is facing a stagnate job market as artificial intelligence related efficiencies cascade through various industries. Rising prices at the pump combined with a stagnate job market will likely affect President Donald Trump’s approval rating heading into midterm election season as the conflict provides more fuel for a growing dissatisfaction with him and the republican party.

 

Effect on Politics

 

By the end of the oil crisis President Nixon had an approval rating of about 25% and it would never go above 30% for the rest of his tenure. Prior to the war with Iran, President Trump’s approval rating was around 40% with many Americans believing he has backed tracked on his campaign promises and gone too far with his immigration reform policies. It is too soon to get complete and accurate data about the current public opinion of President Trump because of the war, but early statistics say that nearly 60% of citizens do not approve of the conflict with Iran. President Trump’s approval ratings will assuredly influence the upcoming midterm elections. Trump-aligned Republican leadership will likely face significant opposition during the primaries as people feel the effects of higher gas prices and a tightening labor market.

 

Early polling data suggests that the Republicans are extremely likely to lose control of the House in November. But if the conflict with Iran continues and the Strait of Hormuz remains closed, Republicans could risk losing control of the Senate as well. Political polarization regarding approval of the conflict with Iran is stark. Most of the support for the conflict with Iran is coming from the Republicans, with some estimates even saying that nearly 80% of Republicans are pro-war. In contrast, less than 10% of Democrats approve of Trump’s attacks on Iran.

 

A Blow to the Consumer

 

One thing that both the Democrats and Republicans can agree on is that they want to maintain an affordable standard of living. Polling data suggest that both democratic and republican voters are prioritizing affordability as they make voting decisions for midterm elections. Within the first month of the war gas prices have increased by nearly $1 a gallon with crude oil remaining stubbornly above $100 a barrel. However, the conflict with Iran has other far-reaching effects outside of oil and gas. Mortgage Rates have recently reached a three month-high with averages around 6% across the United States. Prices for consumer goods are also likely to see significantly increases due to supply chain disruptions. For instance, roughly 30% of the world’s fertilizer supply goes through the Strait of Hormuz. Supply chain disruptions in the fertilizer market will affect the growth of agricultural products and ultimately consumer prices in the grocery store. Materials for the manufacture of plastic also transit through the Strait of Hormuz which will make household items like soda bottles, utensils, and shower curtains more expensive.

 

President Trump has already started to look for plans to curtail unaffordability. On March 22, the President announced that he is looking into portable mortgage programs. The president has also repeatedly stated that negotiations are ongoing with Iran, causing volatility in the stock market with his dubious assertions which have often preceding large jumps in stock indices. Only time will tell how high consumer prices will rise and how politicians will address affordability issues among American voters.

 

While history may not repeat itself exactly, the striking parallels between the 1970s energy crisis and the current conflict with Iran are difficult to ignore. Rising oil prices, economic uncertainty, and declining confidence in American political leadership are once again shaping the United States. Just as the Yom Kippur War reshaped the economy and the political landscape of America, the current conflict with Iran and tensions in the Strait of Hormuz are already starting to influence inflation, consumer behavior, and voter sentiment. If these patterns continue, the United States is likely to again see a shift in political power driven by economic dissatisfaction. The growing political polarization amplifies these effects, suggesting that the consequences will extend well beyond the battlefield.