US: The Oil Question: To Fret or Not to Fret
THE United States has managed to thrive despite high budget deficits and a staggering level of international indebtedness. Can it also thrive if oil prices remain above $40 a barrel and gasoline costs more than $2 a gallon at the pump?
The standard answer is yes, and the argument goes like this: First, oil prices are still lower, after adjusting for inflation, than they were in the 1970's. Second, the United States is much less "energy intensive'' than it was 30 years ago, using about half as much oil to produce each dollar's worth of output. Third, even a big jump in oil prices is typically a one-time hit on consumer prices and not a prelude to sustained inflation.
Ben S. Bernanke, a Federal Reserve governor, has argued that the biggest change since 30 years ago is the stunning decline of inflation.
When inflation and inflation fears were high in the 70's and 80's, Mr. Bernanke has argued, the Fed felt compelled to react to higher oil prices by raising interest rates and slowing the economy. Fed policy, or fear of Fed policy, was the real reason that recession followed the oil shocks of 1974, 1980, 1990 and 2000.
Today, Fed officials believe that inflation is so low that they have no need to react in the same way. Indeed, if higher oil prices were to cause a dip in economic growth, the Fed might view them as a reason to keep interest rates low.
All that may well be true, but there are reasons to be concerned. The United States has become habituated to low oil prices. The American love affair with heavy S.U.V.'s and pickup trucks has driven the average fuel economy of new cars to its lowest level in more than 20 years.
And while it is true that the American economy has grown much faster than its consumption of oil, it is also true that American oil imports have skyrocketed while American oil production has declined.
Crude-oil imports have jumped to about 9.6 million barrels a day in 2003, from about 5.8 million barrels a day in 1990. Add imports of other petroleum products, from natural gas to gasoline, and the United States is now importing about 12 million barrels a day, about 60 percent of its consumption.
It is true that energy accounts for a smaller share of the total economy than it did 30 years ago, but the difference is not as profound as it first appears.
The Energy Information Administration, a statistical arm of the Energy Department, estimates that energy expenditures are now about 6.5 percent of the nation's gross domestic product. By contrast, the energy share soared from 8 percent to 14 percent of gross domestic product immediately after the oil embargo of 1973.
It is soothing to think that the United States' energy intensity has declined because businesses and consumers have become more efficient and more focused on knowledge-based industries like finance, software and technology. But while that is true in part, energy intensity fluctuates with energy prices. Energy prices have been low or declining for two decades, so energy spending has played a smaller role in the total economy. But with oil and natural gas prices both near record levels, the United States is likely to look a lot more energy intensive this year.
Few experts, if any, believe that oil prices are about to tip the United States back into a recession, as happened after four of the five last oil-price shocks. But Jan Hatzius, an economist at Goldman Sachs, said optimists might be overlooking several worrisome details.
Even though oil consumption has declined as a share of the total economy, Mr. Hatzius notes that oil imports are just as big a share as ever of the gross domestic product. Because oil imports have climbed so sharply, higher oil prices mean that more money leaves the United States and less is simply recirculated from oil consumers to oil producers.
There are other jolts as well. American car companies, for example, have become dependent on the sale of bigger, heavier sport utility vehicles and pickup trucks. Leave aside last year's frenzy over the Hummer H2 S.U.V., which gets about 11 miles to the gallon but has already seen its popularity plunge.
Consider what happened to Detroit's Big Three car companies in the 1970's, when they found themselves blindsided by demand for small cars. In their panic to change course, they introduced several of the worst new cars of all time: the Chevy Vega, the Ford Pinto and the A.M.C. Gremlin.
"The auto industry has a huge problem,'' said Philip K. Verleger Jr., an independent oil analyst based in Newport Beach, Calif. "Detroit is once again going to have to retool with hybrid cars of whatever the market demands.''
Not surprisingly, the Bush administration has used high oil prices to argue that Congress should pass energy legislation that would hand out $18 billion in tax breaks to oil and gas companies, renewable-energy producers and others.
But none of that will do much to curb soaring demand for oil anytime soon. At the moment, the only real impulse for energy conservation is the one that comes from higher oil prices.
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