High Oil Consumption in U.S. Constraining Supply
By Joseph D. Villalon
OPEC raised the price of crude oil in world markets in 1973. During this time the price of crude oil rose 50 percent. The result was a supple shock, reduced supply of gasoline, since crude oil is the major component used to produce gasoline. Countries around the world, including the United States experienced inflation and recession. Many placed the blame squarely on OPEC for the ensuing problems with gasoline supply, but economists have blame policymakers for limiting the price that oil companies could charge for gasoline. In time, the price of oil declined about 10 percent a year and U.S. policy makers repealed the regulatory polices it had put in place to control the price of gasoline.
The recent surge in oil prices is due to a large amount of consumption, especially in the U.S. in which 25 percent of the world's oil output is used. The increase in global oil consumption last year was the highest increase in nearly 30 years. A second reason for the rising oil price is that supplies are constrained coupled with the large consumption by countries such as the U.S., China and India.
Optimists argue that, when adjusted for inflation, oil prices are not near previous peak prices. Along with that argument is the opinion that oil is cheap and will not impact economic growth. This is a misconception when very high consumption on a sensitive supply is realized.
Higher oil prices, even though lower than previous highs when adjusted for inflation, do have an adverse effect on nearly everything. In the U.S., prices for travel, shipped goods, and services all increase with fuel prices. Consumers have to adjust what their dollars are being spent on to continue to be able to afford the high prices at the gasoline pump.
Additionally, consumers are expecting an increase in inflation rates in the coming years. Thus, consumers become pessimistic and will spend less money, a decrease in consumption, to compensate for higher energy prices. Wages are not being increased to offset the high energy prices due to the global labor market. Historically, companies would index workers' incomes to inflation and provided pay raises when oil prices increased. Imported goods are cheaper and replace American goods or leave U.S. manufacturers no choice but to keep their prices low while having to work with higher fuel prices.
Even though the Department of Energy does not feel that oil prices are high enough to cause a recession, the consequence of high energy costs cannot go unaddressed.
Oil prices can be compared to a tax on consumption. Nearly every good and service in the U.S. is dependent on oil as a fuel. From travel to shipping freights and other services, the price of energy must be included. If fuel costs rise, the prices of the product or service rise and are passed on to the consumer. Any event that might decrease consumption will affect aggregate demand by shifting the curve to the left, decreasing the quantity output and essentially the real...