Oil shocks and reversal of political fortunes

Rabah Arezki, Simeon Djankov, Ha Nguyen, Ivan Yotzov 30 October 2020



The increase in gasoline prices stemming from the oil crisis overshadowed the US presidential debate of October 1980. Ronald Reagan and then-President Jimmy Carter were going head to head in the election. Carter, the incumbent, ended up losing his re-election bid that year, a timing that coincided with a peak in oil prices. In fact, other modern US presidential incumbents – for example, Presidents Ford and Bush Sr. – lost their re-election bids following oil price spikes (see Figure 1, in which the red vertical dotted lines denote election years where the incumbent lost). This anecdotal evidence points to a broader question about the role of exogenous shocks in driving electoral outcomes.

Figure 1 Oil prices and US presidential elections

Note: Dotted lines indicates the three times in modern history that incumbent US presidents lost their re-election bids.

A large literature suggests that voters favour candidates who are expected to deliver the highest ‘monetary return’. Authors have argued that – in addition to self-interest – ideology, culture, and moral codes drive the behaviour of voters. However, the empirical support for the role of ideology is mixed (Degan and Merlos 2009). Using US election data, Henry and Mourifie (2013) empirically reject that ideological bias. 

A consistent finding in the literature is that the incumbents’ electoral fortunes suffer following exogenous shocks. Indeed, several papers examine the effects of natural disasters or other shocks originating outside the local economy on elections (e.g. Achen and Bartels 2017).

In a recent paper (Arezki et al. 2020), we explore the effect of oil price shocks on the odds of the re-election of political incumbents. We use a novel data set of 207 elections in 50 democracies. In addition to the 207 elections, our dataset includes polling data in the run-up to elections, which allow us to explore the effect of exogenous shocks before elections. Depending on the political system, the dataset includes elections of the chief executive in parliamentary or presidential systems. 

As large oil imports leave a country vulnerable to changes in crude oil prices, we rely on these prices as an exogenous source of variation in terms of trade. The shock consists of two components: the change in international crude oil prices and the exposure of a country to crude oil imports.

Our results show that an increase in oil prices one year before an election significantly reduces the odds of re-election for the incumbent party. In our sample, the average crude oil price shock is 0.25% for elections when the incumbent party loses, and -0.55% when the incumbent party wins. 

This pattern suggests that a negative terms-of-trade shock associated with rising oil prices could contribute to the change in political fortune for incumbents. When the contemporaneous effect and annual lags of oil shocks are used, the one-year lag is the only one that causes a significant electoral turnover. 

When different quarterly lags are used (up to eight quarters before the elections), only oil shocks four and five quarters before elections are significantly correlated with the change of power. This period may best coincide with the electoral cycle, though further research is needed to ascertain this hypothesis.

Since most countries in our sample are oil importers, an increase in crude oil prices would reduce the purchasing power of the population, consistent with Hamilton (2003) and Blanchard and Gali (2009). We find that an increase in oil prices one year prior reduces consumption growth. This reduction could explain why voters react so strongly against incumbents, come election time.

Both right-leaning and left-leaning incumbent parties are likely to lose elections following a crude oil price increase. We verify that the winning parties are more likely to belong to the opposite end of the political spectrum as the incumbent. In other words, following an oil price increase, a left-leaning incumbent party is more likely to be replaced by a right-leaning party and vice versa.

The results remain robust to a variety of checks and alternative specifications. Results from polling data reinforce our main findings. We use data from multiple polls before a general election, which are aggregated to construct a monthly series. 

We find that for each election, fluctuations in oil prices 12 months before the polls reduce voters’ intention to re-elect the incumbent party. Our results survive when we control for voter turnout, pre-determined elections, some additional macro variables, and different lag structure for oil shocks.

The systematic nature of the bias against the incumbent, irrespective of political leaning, suggests a rejection of the often-argued voting based on ideology. Citizens on average vote without a clear ideological pattern in response to exogenous shocks.


Achen, C, and L Bartels (2017), Democracy for realists: Why elections do not produce responsive government, Princeton University Press.

Arezki, R, S Djankov, H M Nguyen and I V Yotzov (2020), “Reversal of fortune for political incumbents after oil shocks”, Policy Research Working Paper WPS 9287, Washington DC: World Bank.

Blanchard, O J, and J Gali (2009), “The macroeconomic effects of oil price shocks: Why are the 2000s so different from the 1970s?”, in J Gali and M Gertler (eds.), International dimensions of monetary policy, University of Chicago Press, 373-428.

Degan, A, and A Merlo (2009), “Do voters vote ideologically?”, Journal of Economic Theory 144: 1868–94.

Hamilton, J (2003), “What is an oil shock?”, Journal of Econometrics 113(2): 363–98.

Henry, M, and I Mourifié (2013), “Euclidean revealed preferences: Testing the spatial voting model”, Journal of Applied Econometrics 28: 650–66.



Topics:  Politics and economics

Tags:  elections, exogenous shocks, macroeconomic shocks, oil prices, oil shocks, voting

Chief Economist & Vice President, African Development Bank & Senior Fellow, Harvard’s Kennedy School of Government

Policy Director, Financial Markets Group, London School of Economics

Senior Economist at the World Bank's Chief Economist Office for the Middle East and North Africa region

PhD candidate, University of Warwick


CEPR Policy Research