I’m someone who is more sanguine than most that high oil prices won’t be economic Armageddon. Obviously now would be a particular bad time for oil prices to shoot up, as the economy already sucks, but longer run I don’t see it as an economy killer. It will be a negative hit, and production and transportation patterns would change, but I don’t think it will fundamentally alter existence.
I sort of disagree. Here’s how I see it. The best way for anyone to change their oil consumption is to move. Either to a place where you need to drive less, or else to a place where you don’t need oil to heat your home. But in the short term, it’s very difficult for households to cut oil consumption by relocating. Consequently, in the short term the demand for oil isn’t very elastic. That means that if you brought oil up to $200 a barrel by raising taxes you’d generate a bunch of revenue that could be offset with lower income taxes or what have you. But if oil goes up to $200 a barrel because of supply constraints, then that entails a rise in America’s net imports and therefore a drag on GDP. In the long run, I’m sure we can adjust to high oil prices the same as we’d adjust to anything else. But in the short run, the issue with oil isn’t just inconvenience to households, it’s the impact on the trade balance.
In general, I feel like there’s huge denial around the role of petroleum in America’s trade deficit. Back in the 1940s and 1950s, US firms had a dominant position in the automobile industry and the USA was a major oil exporter. And we’ve never switched away from industrial policy oriented around suburbanization, auto dependency, and high per capita levels of oil consumption even though nowadays it’s an industrial policy only Venezuela, Saudi Arabia, and Norway could love.