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Oil Shock Vulnerability

This from a CAP report is a nice graphical illustration of the relatively small impact of oil price swings on gasoline consumption in the short term:

What that means is that if disruption in supply countries or a spike in demand in Asia causes prices to go up, aggregate spending on oil imports leaps. That puts a hammer on all spending on non-oil goods. The basic problem exists in all developed countries, but we have an unusually bad case of it because we’ve built an infrastructure that depends on very high levels of routine gasoline consumption (not just driving everywhere, but driving long distances and doing it in big cars) and that in many cases offers no viable alternatives. Moving away from this over the longer term would put a lot of extra resilience into the economy.

And note that whether or not we’re consuming “foreign” oil makes extremely little difference here. If domestic production were larger relative to domestic demand that would alter the extent to which price spikes impact our trade balance, but it would still be the case that every sector of the economy that involves making and selling things that aren’t oil gets hammered any time there’s a price spike. The fundamental issue is inflexible dependence on oil, not the oil’s nation of origin.

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