Gas Prices and Presidential Politics

How rising oil prices could play into the 2020 election
Photograph: Shutterstock

FRAMINGHAM, Mass. —While President Trump has enough problems with possible impeachment and the Southern District of New York's investigations, it is the price of gasoline that could affect the elections of 2020 to a greater extent.

To paraphrase Adlai Stevenson, a two-time losing presidential candidate, it is the price of pork in St. Louis on election day that determines the White House. In all deference to Middle America and a good pork chop, Americans are hypersensitive to gasoline prices, with an average driver willing to drive 10 miles to save 5 cents on a gallon of fuel, according to some consumer surveys.

The recent run in Brent and West Texas Intermediate (WTI) crude oil prices has been driven by several factors, none of which look to be reversed any time soon:

  1. The tightening of sanctions on Iran that have taken 2 million barrels per day (bpd) out of the world supply and maybe more since the squeeze on capital and technology will do as much or more to limit future supply from the crumbling Iranian production infrastructure.
  2. Venezuela is producing 2 million bpd less, and it will get worse there before it gets better.
  3. Trump’s “friends” in Saudi Arabia and Russia are actually producing less as the old “cobweb” pricing cycle takes hold: As prices rise, state-run enterprises can produce less while keeping revenue constant. The cobweb works wonders for users when the price is collapsing, and ironically, suppliers must produce more to keep revenue constant. The cobweb is the basis for oil’s price volatility.
  4. U.S. liquid fuels demand is at a record 11.8 million bpd, and world demand is up another 2 million bpd.
  5. The 7.5 million-bpd jump on a 98 million-barrel base of global demand is an 8% swing. That translates to a 16% rise over the lowest-cost marginal producer at $60, which implies $70 crude.
  6. Although U.S. production is at a record 11.5 million bpd and rig count implies 17 million bpd by summer’s end, only the Permian is showing great future activity while the rest of the U.S. is flat. So it will be hard for the U.S. to fill the world gap with record domestic usage and refinery outages. WTI at $75 is probably the next stop, and the price we need to boost non-Permian production.

What does $75 crude imply for retail gasoline prices? After factoring in the crack, wholesale and transport costs, taxes and a 19-cent-per gallon retail margin, it would put the national average at $3.17 per gallon. This compares to a national average around $2.87 today and $2.50 a year ago. Another 30 cents per gallon will cost the average household with 2.3 cars almost $500 more per person, or $124 billion in U.S. gross domestic product.

While the stock market generally reacts favorably to initial rising oil prices--as it is a sign of growth and helps the exploration and product sector earnings--eventually high oil prices hit equity negatively. Let’s hope the Saudis and Russia improve as friends to Trump and the U.S. That said, hope is not a strategy.

Joe Petrowski serves as director of fuels for Yesway, where he oversees all operations of the fuels team, including pricing, procurement and management of the firm’s fleet services program. In addition, he works closely with the company’s senior executives to help manage Yesway’s growth, improve operations and implement the firm’s business plan. Prior to joining Yesway, Petrowski was CEO of Cumberland Farms Gulf Oil Group, a diversified petroleum and retail convenience store holding company located in 29 states with more than 8,000 employees and $13 billion in annual revenues. After leaving Cumberland Farms, he founded Mercantor Partners, a private equity group focused on downstream energy distribution and retail convenience. Petrowski remained chairman of Gulf Oil through 2017 and oversaw the sale of Gulf Oil to ArcLight Capital Partners in 2015.

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