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Today the U.S. economy is as dependant as ever on oil.

Today the U.S. economy is as dependant as ever on oil.

With oil prices consolidating around $40 per barrel, forming a base upon which future price increases will likely be built, there is no shortage of Pollyannas willing to dismiss the toll higher oil prices will exact on the U.S. economy. One of the most often cited statistics is that since oil now represents a smaller fraction of U.S. GDP that it has in the past, the impact of higher oil prices will be less significant. Upon reflection, this analysis is overly simplistic.

While it is true that oil’s share of GDP has declined form 3.2% in 1980 to about 1.7% today, such a superficial analysis ignores the fact that the production of goods, an energy-intensive process, accounted for a far greater share of America’s GDP in 1980 than it does today. Since 1980, goods exports have decreased from 8% of GDP to 6.8%, while goods imports have risen from 8.7% to 12%. Further, due to the composition of the goods involved, the production of imports is likely more energy intensive than the production of exports. In other words, since America now imports many of the goods formerly produced domestically, it directly consumes less oil. However, oil remains a necessary component in the manufacturing process, the cost of which is now increasingly embedded in the price America pays for imported products.

For example, in 1980 a pair of shoes purchased in New Haven, Connecticut, might have been manufactured in a factory in Hartford. The oil necessary to produce these shoes would have been consumed domestically, and therefore directly included as a percentage of U.S. GDP. However, since today that pair of shoes is likely to have been produced in China, the oil consumed in the production process is now not included as part of U.S. GDP. However, that cost is indirectly passed on to American consumers in the price of the shoes. Oil is just as significant to U.S. GDP, it’s full costs are just hidden in the prices of non-oil imports.

However, since shoes manufactured in China must also be shipped across the Pacific Ocean, the oil consumed in transportation is now far more significant today than it was in 1980. The cost of the oil needed to ship shoes to America, and the extra cost required for those ships to return to China empty, are also indirectly passed on to American consumers in the price of imported shoes. Once these shoes arrive at a port in California, they must then be trucked 3,000 miles to the East Coast. The cost of oil consumed in domestic transportation, which is included as part of U.S. GDP, is nevertheless significantly higher than it was in 1980, when those shoes needed to be transported fewer than 100 miles.

Factoring in the indirect cost of non-oil import prices, the addition of previously non-existent international shipping costs, higher domestic transportation costs, the relative fuel inefficiency of America’s current fleet of vehicles, owing specifically to the proliferation of gas-guzzling SUV’s, and current fiscal and monetary policy, which together with creative government accounting, artificially inflate today’s GDP figures, America’s dependence on oil, particularly foreign oil, has probably never been greater. At a time of increasing global demand, inadequate supply, and escalating world-wide tensions in oil producing regions, it is certainly not credible to be downplaying the significance of rising oil prices.

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