Fair use act: for educational purposes
[hope this cut and pasting works]
from
http://www.stratfor.com/MEAF/commentary/0008300143.htm
0143 GMT, 000830
Crude oil
prices are higher than at any time in the last 10 years,
tripling in the last two years alone. And yet, the worlds
largest consumer of oil the United States rolls along,
its economy largely unaffected. There are no gas lines, no
crippled factories, and no signs of the economy faltering.
The importance
of oil to the global economy is changing. In increasingly
advanced economies, the price of oil still matters but far
less than it did in the 1970s and as recently as a decade ago.
But oil is
still central to the heavy industry economies of Asia and
Europe, regions that will suffer for todays price spikes.
Over the long term, power relationships between the worlds
oil producers and oil consumers will shift - as will economic
relationships between competing oil consumers.
Todays
Prices In Context
Prices have not
merely soared; they have tripled since late 1998. And yet,
neither an energy crisis nor an economic crisis appears to be
brewing. This is a dramatic departure from historical trends.
In the past 30
years, three events triggered huge spikes in prices, followed by
recession in the United States: the 1973 Arab oil embargo, the
Iran-Iraq war in 1980 and the Iraqi invasion of Kuwait in 1990.
The American economy stumbled or shrank after each of these
events.
Yet today, the
U.S. economy has thrived even as prices have risen, from 1998 to
the present. The U.S. economy grew by 5.3 percent in the second
quarter of 2000. The answer to this riddle is fundamental and
simple: Americans are using more oil than ever before, but per
capita oil consumption is significantly lower today than in the
1970s and early 1980s. Interestingly, the Clinton administration
did not begin lobbying oil producers until fairly recently,
after prices passed $25 per barrel.
see graph
Measured by the barrel or by the price at the pump, todays
energy prices are high. However, an analysis of oil prices
adjusted for inflation indicates that prices are not yet as high
as they were in 1975 and 1991 when climbing energy costs
triggered inflation and recession in one case, and the 1991 Gulf
War in the other.
In
the mid-1970s, when the oil crisis hit U.S. drivers, the auto
industry particularly in Detroit suffered major revenue
losses as American car-buying screeched to a halt. Auto
engineers desperately worked to redesign vehicles to make them
more efficient, but computer-aided tools that would allow
automakers to make more rapid and effective design modifications
were nowhere near as available or capable as those today.
In
1981, following the oil price surge, interest rates hit
double-digits, the inflation rate hit 9 percent and unemployment
approached 8 percent. The crisis mentality prompted a series of
government actions that actually made things worse for the
overall economy: gasoline rationing, price controls, and heavy
regulation, which interfered in the energy markets. Despite
todays inflated energy costs, inflation and unemployment are
less than half 1980s levels.
The
1991 oil price hike, though fairly short, still affected
domestic U.S. markets. The construction industry experienced a
13 percent decline in nonresidential building contracts,
according to the National Association of Homebuilders.
Additionally, the U.S. airline industry lost $2 billion in 1990.
According to Air Transport Association Vice President Edward
Merlis, the largest chunk of the loss $1.7 billion took
place in the last quarter of 1990 after the Middle East crisis
raised oil prices. Between August and October of 1990, the price
of jet fuel rose by 76 cents to $1.39 per gallon. Again, despite
todays prices, U.S. housing markets overall are still strong
and the airline industry has not reported losses thus far.
The nature of
the U.S. economy has changed not just since the 1970s, but in
the space of only a decade. The strategic importance of oil has
fallen as the economy has shifted from an industrial foundation
to a technological one a trend that is likely to continue
and intensify in the foreseeable future.
It takes much
less energy to design computer hardware and software than to
manufacture automobiles or military equipment. The American
economy has shifted fundamentally, from depending on industry to
depending on services. In 1999, only 22.9 percent of the U.S.
gross domestic product was accounted for by industry while 75.4
percent could be attributed to services.
As a result,
oil consumption accounts for an increasingly smaller percentage
of GDP, according to data from the U.S. Energy Information
Administration. From 1950 to 1970, the amount of oil consumed
for every $1 million of GDP fluctuated but did not decrease
substantially. But from 1970 to the present, oil consumption per
$1 million of GDP has dropped by nearly half. Simply put, the
United States is getting much more bang for the barrel.
In 1976, it
took more than 1,400 barrels of oil to produce $1 million worth
of goods or services. Today, it takes only about 800 barrels.
Source:
U.S. Energy Information Administration
Oil Shocks
Is the American
economy immune from oil shocks? No, but it does enjoy greater
resistance.
To
be sure, some sectors of the economy and regions of the
country are still susceptible to price shocks. The trucking
industry is beginning to feel the effects. The price of diesel
fuel has surged due to fear of a winter shortage. According to
the Oil Price Information Service, a single over-the-road truck
might need $375 more per month for diesel if the recent price
gains hold. Some owners of small trucking businesses have even
expressed fears that they may have to shut down.
In general,
regions with heavy industry will be hurt, as they have been in
the past, by increasing energy costs. Factories and production
lines require great amounts of energy to operate and maintain.
Increasing energy costs push up production costs that cannot
easily be passed on to consumers due to stiff competition. On
the other hand, technology-based regions such as Silicon Valley
will thrive despite increasing energy costs. Hardware, software
and information systems do not require significant amounts of
energy to produce and disseminate.
But to inflict
the same kind of damage that occurred in the 1975 crisis, for
instance, oil prices would have to reach nearly $40 per barrel.
To achieve as dramatic an effect as 1983, when the country
slumped into a recession, prices would have to nearly triple
from todays levels and reach about $89 per barrel. Certainly,
some Americans will feel the pinch of high prices this winter
particularly those with low stocks of heating oil but it
is unlikely that this will reach crisis proportions.
Barring an
outright embargo or loss of oil sources in Saudi Arabia, Mexico
and Venezuela the chief suppliers to the United States
the increasing independence of the U.S. economy from oil shocks
will probably continue into the foreseeable future.
While the
United States is likely to suffer a recession in the coming
decade, it is more likely due to other factors such as
retiring baby boomers drawing down their investments from
capital markets than to an energy crisis. Along with others,
the United States is in fact just beginning its technological
development.
Next:
How todays price hikes will impact other world economies and
affect the relationship between the worlds oil producers and
oil consumers.
-- (PERRY@OFUZZY1.COM), August 30, 2000