United States
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Our Consumption
- -The U.S. petroleum industry's price has been heavily regulated through production or price controls throughout much of the twentieth century. In the post World War II era U.S. oil prices at the have averaged $20.94 per barrel. The price of a barrel now is ranging up around $70. It is unnerving that the United States is consuming more oil than ever at this price per barrel. Not only are we consuming more oil, but our production is the lowest it has ever been.
- -The USA remains by far the largest oil consumer with declining domestic production now meeting considerably less than 50% of consumption. With the U.S. oil production declining and the demand increasing, U.S. net oil imports are climbing steadily.
The Current Situation
- -The record rise in oil prices to $75 a barrel last week has raised fears among oil consuming countries for big consumers like the United States that high energy costs would snuff out economic growth. The price spike immediately refocused the national agenda to an urgent economic issue, the pressure the US is putting on Iran to stop its nuclear program, the country in which we import most of our oil form.
- -This economic situation has not been our government’s main focus after the destruction caused by Hurricane Katrina which cost $105 billion and does not account for damage to the economy caused by potential interruption of the oil supply and exports of commodities such as grain.
- -The storm interrupted oil production, importation, and refining in the Gulf area, thus having a major effect on fuel prices. Before the storm, one-tenth of all the crude oil consumed in the United States and almost half of the gasoline produced in the country comes from refineries in the states along the Gulf's shores. The impact is clear knowing how much oil is consumed by US citizens.
Our Economic Future
- -Macroeconomists fear the impact of higher oil prices on the United States. Barrels were priced at $30 at the end of 2003 and are now found at over $70, this doubling of the nominal price of crude oil will shock the economy. This shock is eminent because these high prices are not temporary but considered to be quite long lasting.
- -In general, economists believe long term price changes will have a much greater effect on economic activity than the recent temporary changes. Temporary changes drop consumption and increase saving for consumers and business investment; however more-permanent changes elicit more substantial modifications in consumption.
- -Inflation will be affected by the large price increase of the price of energy. Although the short run swings might fall on the producers in their profit margins, in the long run the increase will fall squarely on the consumer. This cost pressure feeds into wages in the labor market as workers push to maintain their real incomes.
- -The energy price shock will also likely push an income tax increase. We import 12 million barrels of crude oil a day; the price increase of $30 per barrel will total $130 billion more spent a year on oil to foreigners. Like the impact of inflation, this tax increase will reduce disposable income in households, dropping there spending on goods and services.
- -Recent studies conducted have shown that the adjustments made by households and businesses will reduce the long-run level of potential output in the economy. This is because labor productivity slows after an energy price shock which in effect lowers the trajectory for potential output.
Resources
The Global Impact of Rising Oil Prices 2005
