US is less prone to oil price shocks than in past decades

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Oil is a global market, so when prices rise in one place, they rise everywhere. The current war against Iran has already raised oil prices significantly.

Middle East oil production has been slowed by efforts to close the Strait of Hormuz, a key route for oil tankers from the region to the rest of the world, as well as by attacks – and fears of attacks – on oil production, storage and shipment installations.

And this war has also disrupted the flow of liquefied natural gas from Qatar, which controls almost 20 per cent of the global market. That also affects the world economy and supply chains. And shortages of natural gas affect production of fertiliser and aluminium, as well as other key materials.

Countries that import much of their oil have to pay other countries for that imported oil. That was a problem for the US back in the 1970s through the early 2000s. The US sent billions of dollars a year abroad to oil-producing countries in the Middle East, Africa and Latin America. That money built up other countries’ economies or sloshed around as financial surpluses that fuelled financial market exuberance and asset bubbles that could suddenly pop.

Oil imports increased the US trade deficit in the 1970s and beyond. And as a result, US industries suffered from high energy costs, which forced closures of major US steel plants and iron and copper mines. Falling purchases of cars and other durable goods also stimulated worker layoffs.

Now, however, the United States is a major producer and exporter of oil and refined petroleum products. Every day, on average, the US exports over six million barrels of refined products and over four million barrels of crude oil.

The US does still import some crude oil, most of which is heavy oil from Canada handled at certain American refineries on the US Gulf Coast. Factoring in those imports, net US oil trade balance is a positive 2.8 million barrels per day, as contrasted with the mid-2000s, when the balance was a deficit of 12 million barrels per day.

US production comes from 32 states – though mainly from the biggest producers: Texas, New Mexico, North Dakota, Alaska, Oklahoma and Colorado. Because that revenue comes to companies in the US, the nation’s gross domestic product is less vulnerable to oil price increases than in the past, when high prices meant more US dollars flowing overseas.

In addition to being less dependent on imports, the US economy is much less oil-intensive than it used to be, producing more economic value with far less oil use today than in the past.

And researchers at the US Federal Reserve report that petrol prices have not been a major contributor to US inflation in recent years. That is because there are lots of ways Americans use less petrol, including telecommuting and remote work, online shopping and using electric vehicles and delivery trucks that run on batteries or other fuels.

Still, other economists disagree and say current oil prices could increase current US inflation rates by as much as 1 percentage point.

Though the US is economically less vulnerable to oil price shocks, there is also a psychological factor. It is hard not to feel pessimistic when petrol prices at the local pump are already rising: Bulk market prices are already soaring amid hedging trades and speculative fervour among traders and wholesalers and on US commodity futures markets.

Americans feel pessimistic about consumer spending when petrol prices are rising. And a study found that high petrol prices even make people feel unhappy.

Research also shows that people tend to put off major durable goods purchases, such as automobiles, when oil prices rise sharply. That could mean bad news for the US auto industry.

But it is also possible that high petrol prices might encourage more Americans to consider buying electric cars. That could help the car companies that were having difficulty moving their electric-vehicle inventories. And for people who own electric vehicles, the war and its resulting price increases can be a reminder of the benefits of living petrol-free.

More broadly, the war might be yet another reminder of the benefits of diversifying energy sources away from fossil fuels. As my research shows, oil price shocks generally lead to greater investment in clean technologies.