Oil prices above $50 a barrel probably would have sunk the U.S. economy into recession a couple of decades ago. But prices broke $50 late last September and recently have spiked closer to $60. Though those higher prices are beginning to have a bite, the economy is still growing.
That’s because key segments of the economy use a lot less oil than they did back in the 1970s. Those that still run on oil have become more efficient in its use. Others have shifted some of their energy demands to different sources, such as natural gas, coal and electric power. The decline of manufacturing and the rise of the service sector over the last 30 years also have played a role. Banking, retailing, entertainment and the like don’t consume oil the way factories do.
Still, the nation continues to use more oil each year, because 75 percent of it goes into the fuel tanks of cars, trucks and planes to move Americans and their goods. Each year more of that oil must be imported. Four years ago the U.S. imported a little more than 55 percent of its daily oil needs. Oil imports have crept up to about 58 percent now.
The U.S. is better positioned to withstand an oil shock, but higher prices are still causing severe disruptions in the transportation sector–particularly for the financially fragile airlines. With growing world demand, especially from rapidly industrializing China, there’s likely to be pressure on oil prices to rise even higher.
The U.S. House recently passed an energy bill, and it does have some interesting ideas. The legislation would make it easier to build liquefied natural gas import terminals. Daylight-savings time would be extended by two months, saving 100,000 barrels of oil a day. But the bill also lavishes tax breaks on energy industries, and most of them would do little to reduce oil demand.
For example, the House would double the ethanol requirement for gasoline. Ethanol is heavily subsidized, but some research shows that it takes more energy to produce ethanol than ethanol provides. Ethanol does little or nothing to improve the energy efficiency of cars, trucks and SUVS. It is no bargain for American consumers, but it has a powerful lobby behind it.
A national energy policy will need to be more aggressive about reducing the demand for oil. That is especially true in the transportation sector, the largest consumer of oil. One idea is a gradual increase in the gasoline tax, which would induce people to use alternative means of transportation and buy more fuel-efficient cars such as the increasingly popular hybrids. Yes, drivers are already screaming about high gas prices. But in historic terms gas is still relatively inexpensive in the U.S.
The most frequently discussed alternative is to hike fuel efficiency standards for vehicles. But higher standards can’t be implemented quickly, and the full impact isn’t realized until America’s entire automotive fleet turns over, something that takes years and years. Mandated fuel standards also mask the price of efficiency. Their cost gets swallowed up in the price of the car.
With the oil shocks of the 1970s, business became motivated to find alternatives to oil and to operate more efficiently. That is paying off now, cushioning the impact of a doubling of oil prices in the last four years. Now the nation has to get serious about increasing the energy efficiency of transportation. Until that happens, oil, and the oil producers, will still have us over a barrel.
