Analysis: $5 a gallon gas? Listen up, Obama!

BOSTON — Let’s face it: everyone enjoys a righteous uprising like the ones now tearing across the Middle East. But even while we might be rooting for the anti-government protesters, whenever we fill up the gas tank we’re reminded that — like it or not — our own welfare is inextricably tied to those embattled despots.

As the heat has risen in the Middle East, gasoline prices stateside have shot up by about 30 cents, according to the American Automobile Association. And this could be just the beginning. Signs increasingly suggest that we’re at the precipice of another crisis.

The current mess presents U.S. President Barack Obama with a critical opportunity to forge change, to grab the steering wheel and lead in a way that drivers — both Republican and Democratic — can stand behind.

Consider just how tight global oil markets appear likely to become in the coming months. To simplify the discussion, let’s coin a new unit of oil production, roughly equivalent to the amount that Libya pumped daily before the turmoil — about 1.5 million barrels per day. Call the unit the libya (with a small L).

On one side of the equation, global oil demand is soaring, even though the economy is still somewhat sluggish and unemployment is keeping millions of drivers at home. In 2010, in fact, oil consumption reached a record high of about 58 libyas (actually, 87.8 million barrels per day) according to the International Energy Agency (IEA). We achieved this record by burning two libyas per day more than we did in 2009.

At the start of 2011, that left us with just three libyas in excess capacity to spare each day. This excess capacity — oil that could be pumped each day, but isn’t because it’s not needed — is vital to global energy stability. It provides a margin against hurricanes, wars and the like. But it’s becoming increasingly stressed.

Economic growth this year is expected to consume one additional libya (bringing oil consumption to a record of 89.3 million barrels per day). This substantial rise in demand caught industry pundits by surprise. It exceeds the International Energy Agency’s last medium-term predictions by about three libyas.

So what’s causing this record demand?

Growth from emerging markets has rapidly outpaced expectations. During the recession, countries like China and Brazil stimulated their economies by promoting car sales, through subsidies and tax breaks. That helped China become the world’s biggest car market. Still, there are only about 35 cars per 1,000 people in China, compared to almost 600 in Europe, and more than 800 in the United States. Since so few Chinese own cars, the country’s massive market is poised to continue growing at 10 to 15 percent per year. Unless we can convince the Chinese not to drive, oil consumption is poised to continue soaring.

The trouble is, supply is also increasingly under pressure. In a best-case scenario, rising demand leaves the world with just two libyas to spare. Of these two remaining libyas, one is at war seeking to oust Libyan leader Muammar Gaddafi. That means later this year we might have just one libya to spare. That’s far less than the 5 percent margin that defines a supply crunch.

This dangerously tight oil supply could get worse if simmering uprisings boil over elsewhere in the Middle East. Especially critical to oil supply are major exporters like Algeria (which produces about 1 libya), Iran (2.5 libyas) or Iraq (1.5 libyas); regimes in each of those countries have been targeted by protesters. Even uprisings that turn out to be less violent than Libya’s could cause disruptions, given that the world is depending on the Middle Eastern leaders to develop new fields just to maintain supply at current levels in the future.

In addition to the Middle East, OPEC countries elsewhere pose perennial concerns. One is Nigeria (1.5 libyas), where an active insurgent group regularly targets the oil industry, and where Muslim-Christian violence has erupted in recent months. Another is Venezuela (1.5 libyas) ruled by a brash dictator who enjoys taunting the United States.

The exporter that trumps all others, however, is Saudi Arabia, home to nearly every drop of excess oil capacity. As GlobalPost reported recently, some oil veterans — notably Texas billionaire T. Boone Pickens — doubt that the Saudis actually have the capacity that they claim, pointing out that their aging fields struggled to keep up with demand in 2008, when prices last spiked.

Meanwhile Saudi Arabia’s leadership, long regarded as a citadel of stability, is beginning to appear vulnerable. Over the past few weeks, the Saudi stock exchange has plunged more than 20 percent despite the windfalls it should earn from oil, its biggest financial driver. The country’s leader, King Abdullah, 87, is suffering from health problems. Anti-government activists — fed up with unemployment and inequality — are calling for days of rage on March 4, 11 and 20, despite 36 billion dollars in handouts recently promised by the royals.

All of this is beginning to translate into economic pain. Oil prices have already climbed from less than $80 in July 2010 to more than $100. Benchmark Brent crude closed at $116 on March 2. For what it’s worth, Libya’s top oil official warned that prices could reach $130 in the next month. Whether it continues to rise, of course, depends on the Middle East’s disgruntled citizens and whether their leaders step down like former Egyptian President Hosni Mubarak, or fight like Libya’s Muammar Gaddafi.

So what does this mean at the pump? And what impact will it have on the American economy?

According to an analysis by Deutche Bank, every $10 increase in oil prices translates into a 25 cent increase per gallon. That, in turn, demands $25 billion in excess energy spending by American households, reducing economic growth by 0.2 percent (by taking away from other spending, such as on consumer goods). If the Libyan oil official is correct, this means we could soon be paying in excess of $4 per gallon. An increase to just $3.75 by this summer would wipe out the benefit from the recent tax cut, according to Cullen Roche, founder of the investment research firm Pragmatic Capitalism.

That brings us back to President Obama. Like just about every U.S. leader since Jimmy Carter, as a candidate Obama promised to wean America off imported oil. He promised that we would get 80 percent of our energy from clean sources by 2035. Having inherited a dire financial situation, Obama has had plenty on his to-do list, but so far his energy pledge has been an empty promise.

The looming energy crisis provides the opportunity to change that. Crises, after all, drive the agenda in Washington. The administration of George W. Bush understood well how to use that fact for political advantage. Under Bush, 9/11 became a pretext for invading Iraq and expanding presidential power. California’s electric crisis became a catalyst for an agenda friendly to oil producers.

In contrast, Obama has been criticized for being out of touch, for pursuing nuclear disarmament and health-care reform when the public needed jobs and economic growth. The current crisis will no doubt galvanize Americans over the need to do something about the rising cost of commuting to work and driving to the store. Obama can seize this opportunity to finally fulfill his own promise on energy, and to put America on the road to energy independence.

Follow David Case on Twitter: @DavidCaseReport