Opinion: The one number that could decide the fate of Biden and Trump

Opinion by Mark Zandi

(CNN) — The outcome of the presidential election isn’t likely to hinge on abortion, immigration or even climate change. It is likely to depend, instead, on the price of gasoline in the leadup to the vote.

The average nationwide price for a gallon of regular unleaded gas is currently $3.59 per gallon. This is about halfway between the recent low of less than $2 at the height of the pandemic, when much of the world was sheltering in place, and the high of $5 in 2022 as Russia’s invasion of Ukraine and resulting sanctions on Russian oil were having their greatest impact.

Based on my econometric analysis of past presidential election outcomes looking at the state electoral college vote, which accounts for a wide range of political and economic factors, if gasoline falls toward $3 a gallon by election day, President Joe Biden should win re-election. However, if pump prices rise to more than $4, former President Donald Trump is more likely to prevail. This assumes any other changes in the economy and the political situation that could sway voters by election day are more or less a wash.

Ever since our national love affair with cars shifted into high gear about a century ago, gas prices have been central to our sense of financial well-being and important to determining election outcomes.

Gas prices are a small part of the typical American’s budget, accounting for just over 4% of overall consumer spending. But because gas prices often swing wildly, they have an outsized impact on budgets, particularly when prices are rising, since it is tough for many of us to drive less. Regardless of the price, people pay it to get to work, do the shopping and take the kids to school.

Higher prices are especially hard on lower-income households that live paycheck to paycheck. If it takes more dollars to fill the gas tank, these households face a Hobson’s choice — cut back on other spending, borrow on credit cards or pay other bills late. The choice is especially difficult for households in some swing states critical to the election, such as Georgia and North Carolina, where drivers are in their cars a lot.

Because almost everyone buys gasoline regularly and sees gas station prices multiple times a day, the ups and downs have a magnified impact on our psyche. As proof, surveys of consumer sentiment are quite sensitive to the movement of gas prices. The latest in the long-running University of Michigan surveys of consumer sentiment fell sharply as gas prices have jumped since the beginning of the year.

When gasoline prices rise these days, there may be even more hand-wringing than in times past given the pandemic surge in costs for almost everything, especially other staples such as food and rent. Higher gas prices ignite worries that inflation more broadly may be picking up again.

High inflation is particularly pernicious on our moods, since most living Americans have not experienced it before. The last bout of painfully high inflation hit when Baby Boomers were buying their first cars. People also feel the higher prices to be unfair. How can the same good or service cost so much more than it did just a few months earlier? Are we getting ripped off?

Higher gas prices could also forestall long-anticipated interest rate cuts by the Federal Reserve. When setting rates, the Fed pays close attention to inflation expectations — what households, businesses and investors think inflation will be in the future. That’s because these expectations can become self-fulfilling. Nothing shapes household inflation expectations more than gasoline prices, while businesses and investors are especially attuned to the price of oil. If oil and gas prices and thus inflation expectations take off, the Fed will be reluctant to cut rates and may even be forced to begin raising them again.

So, what will a gallon of regular unleaded be selling for in the leadup to the election? Most likely, prices will be roughly where they are today. But that’s a tenuous forecast. Oil prices are determined in a global market buffeted by powerful crosscurrents of demand and supply. Much depends on the strength of the large oil-consuming Chinese economy, the effectiveness of Russian oil sanctions, how much Saudi Arabia cuts back its output, which will be re-evaluated at the next OPEC meeting in a couple weeks and whether US shale oil producers can continue to pump even more from their wells.

Indeed, notwithstanding protestations that Biden’s policies on the fossil fuel industry would undermine it, the US is producing a record 13 million barrels of oil a day, up an astounding one million barrels in the past year. The US has become far and away the world’s largest oil producer. At the same time, US oil consumption has been flat to down over the last two decades, even before the Inflation Reduction Act kicks the clean energy transition into full swing.

But this may not be enough to keep oil and gasoline prices from rising. While tensions between Israel and Hamas and its benefactor Iran have not disrupted oil supplies coming from the Middle East, that could change in an instant. The Saudis could curtail production further to push prices and oil revenues higher to pay for the ample financial support they provide their citizens and massive investments needed to diversify their economy. And global manufacturing, which requires lots of oil, may pick up more than anticipated.

Handicapping the presidential election is an intrepid affair, and watching the polls or betting markets probably won’t get you very far. The best predictor may well be the price of a gallon of gasoline.

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