NCPA - National Center for Policy Analysis

Expensive Oil Weighs Down the Economy

December 7, 2012

As Washington looks for a deal to avoid the impending fiscal cliff, it is important for policymakers to solve the root problems of our nation's economic troubles. Oil dependence is one such root problem, say Frederick W. Smith and General P. X. Kelley, co-chairmen of the Energy Security Leadership Council.

  • Driven by higher oil prices, U.S. consumers will spend about $600 billion more on petroleum fuels in 2012 than they did in 2002.
  • The average U.S. household now spends about $2,700 per year on gasoline, more than double the $1,200 it paid in 2002.

Unsurprisingly, economic growth suffers when consumers are forced to spend more on oil products.

  • When gasoline prices averaged about $3 per gallon in 2010, household spending and overall growth were trending positive.
  • The following year, rapid growth in global demand for oil, combined with the Arab Spring, sent gas prices soaring by almost $0.90 per gallon in the first half of 2011.
  • Our fragile economic recovery was stymied and gross domestic product growth plunged to nearly zero.

As expensive oil weighs down the economy, it also worsens the nation's fiscal crisis. Slower economic growth means less revenue in federal and state taxes.

Some see impending relief in the form of America's domestic oil boom, which they presume will yield cheaper oil. However, even if the United States surpasses Saudi Arabia in oil production by 2020, as the International Energy Agency recently predicted, the realities of the global oil market ensure that prices will remain high over the long term. The price of oil is set by a global market and therefore is impacted by worldwide supply and demand. Rising consumption in China, for example, will result in higher prices in the United States.

However, we are not powerless against oil dependence. There are important opportunities to improve our nation's economic and fiscal outlooks, including:

  • Maximize production of domestic oil and natural gas.
  • Expand access to the Outer Continental Shelf while providing the highest levels of environmental protection and giving greater input to coastal states about which areas should be considered for leasing.
  • Research and development of alternative-fuel vehicles, natural gas, and biofuels should be expanded to heighten fuel diversity.

Source: Frederick W. Smith & P. X. Kelley, "Want to Solve the Fiscal Crisis? Expensive Oil Weighs Down the Economy," National Review Online, December 3, 2012.


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