The Petrostates of America

Yes, the U.S. economy is addicted to oil -- selling it.

BY STEVEN R. KOPITS |

The United States now faces a daunting challenge: The world's crude oil supply has been flat for years, even as emerging economies demand ever greater quantities. To prosper in this environment, the United States will have to make progress in using fuel more efficiently faster than emerging economies can bid away the oil supply. All of which raises the question: Can we live without oil?


To arrive at an answer, we should start in April 2011, when the global economy suffered an oil shortage in the wake of the uprising in Libya and the price of Brent crude, one of four benchmark varieties traded internationally, soared to $123 a barrel. It was a sharp rise, but not entirely unheralded. While oil had averaged $70 to $80 for most of 2010, prices had begun moving up in October of that year as economic recovery lifted demand. Brent crested the $100 mark in February 2011, just as the Arab Spring was beginning to take shape. Two months later, as unrest swept through the Arab world and Libya exploded into civil war, prices reached levels historically associated with oil shocks in advanced economies. At the time, our firm, Douglas-Westwood, warned of heightened risk of recessions by late in the year.
Our forecast held in the case of Europe, which is now in or close to recession. True, this is largely due to the lingering effects of the financial crisis. But Italy, for example, is reeling more from a lack of growth than either fiscal profligacy or excessive debt. And oil prices have surely played a role in stunting growth, starving the country of the resources to repay its financial obligations.
But we were wrong in the case of the United States, which did not succumb to high oil prices, though the situation remained dicey throughout the summer and early fall. The Dow Jones industrial average shed 1,000 points during the summer, and the Occupy Wall Street movement seized Zuccotti Park in New York City, spawning offshoots throughout the country. Negotiations to raise the debt ceiling looked parlous, and the economy threatened to unravel. But, crucially, it didn't.
Instead, as Greeks took to the streets and bond vigilantes assaulted Italy, Spain, and even France, U.S. stock markets began a gradual recovery, and GDP growth stabilized, reaching 3 percent in the fourth quarter of 2011.
Curiously, this growth came as Americans consumed less and less oil. U.S. oil consumption peaked for the post-recession period in July 2010, when oil cost $75 a barrel. When Brent hit $95 eight months later, in March 2011, demand was falling in earnest. By January of this year, oil consumption was 4.7 percent lower than at the same time a year earlier and was back at levels last seen at the trough of oil demand during the worst of the recession. In fact, January 2012 proved to be the third-weakest month for U.S. oil consumption since 1997.
U.S. Consumption, U.S. Average Import Oil Price

Source: U.S. Energy Information Administration, barchart.com, Douglas-Westwood analysis
Falling oil consumption is rare and, in the absence of recession, almost unprecedented. In fact, the United States has only experienced declining oil consumption without an accompanying recession once -- during a 12-month period from 1980 to 1981. In every other instance -- 1973, 1979, 1981, 1990, 2001, and 2008 -- a fall in oil use has gone hand in hand with recession. And, in each case but 2001, rising oil prices were implicated as a cause of the economic slowdown. Oil use is linked to recession through what economists calls the inelasticity of demand, which holds that consumers will resist reducing oil consumption even if prices rise and will only adjust their behavior when forced to do so by a brutal recession.