The use of oil surrounds us in our everyday lives. It is in the products people usually consume and in the cars we all need to keep the economy growing. Clearly, the US is dependent on oil for its economy. If it weren’t then restrictions to the country’s oil supplies would not interrupt its growth. But interruptions obviously do interrupt the US’s growth whenever they occur. In 1973, OPEC made an embargo on the United States and the West, and the US economy went into recession. In 1980 during the Iranian revolution, the American supplies to Middle East oil were cut off, putting the US into recession and inflation. The US remains very dependent on these foreign oil reserves for its functioning economy which leaves us helpless to disruption. The US consumes more than 25% of the world’s oil and this is going up by 2% every year; 57% of this oil being consumed is imported from Canada, Saudi Arabia, Venezuela, and Mexico (Churchill). What this means is the US is built around the use of oil for cheap, reliable energy. The US economy, from its most basic consumer base, cannot survive without it for very long.
Despite the US’s clear dependence on foreign oil the US is less dependent on this oil as it was in 1973 and 1980. According to the New York Times, “the energy used for each dollar of gross domestic product in 1980 was almost 70 percent greater than it is today. While we have collectively wrung our hands over the decline of manufacturing in the country, it has also reduced the relationship between energy prices and growth” (Goolsbee). The US commuter is more dependent than ever though. People live farther from their work and drive more. Because fuel efficiency standards in the US stopped going up in 1990, fuel inefficiency creates a higher demand among US commuter for oil to fill their tanks. When oil prices go up dramatically like in summer of 2008 the US commuter was forced to make difficult choices, and the economy scaled back because the consumer was left in shock by such high prices. This oil shock was right before the economic downturn (Panzner).
On the stock market commodity prices and stock prices have an interesting relationship. When commodities go down in value, stocks usually go up in value (Mitchell). This relationship causes some people to look at oil prices in relation to the US economy as a whole when thinking about where the US economy will be going. Oil prices are a big commodity that many analysts look at, and if oil prices change, commodities in general change. This is because oil is so important for all parts of production in the US economy. For example many household products are made out of oil, and it takes oil to ship these products to retailers. So if oil goes up in price it takes more money to make these things, making the demand for them go down along with stock market prices
In general the price of oil is a good sign for seeing where the US economy is going. From short term changes in the price of oil we can predict these changes such as the sharp increase in the price of oil as the US economy went into its 2008-09 downturn. Recent analysis shows this same kind of pressure is coming for the US economy in the second half of 2010 (Panzner). With the big role oil plays for us it is not surprising these different markets work so closely together. It is possible for oil prices to go down as the stock market goes up so long as there are concerns about the health of the US economy and its economic recovery. Recently oil prices dipped below the $80 per barrel mark which made some say fear over the future of the US economy has caused some to sell their oil (Panzner). This general relationship between oil and the US economy supports the closeness of the two economic indicators in giving the big picture of what is going on in the economy. The question about if the US economy affects oil prices or oil prices affects the US economy more is not as important as seeing the two are very much connected because of the role oil plays in production. Where oil prices are going is a good hint at where the US economy is going in the near future.
The connection between oil and the US economy caused some Americans to criticize the war with Iraq saying it was a war over oil reserves and who has control of the important resource. Estimates say Iraq may have the second highest amount of oil in the world (Luft). With these resources it is not a surprise some would suggest a hidden motive for the US to go to war: the strong connection between oil and the economy. Since the war production of these oil reserves has been volatile which actually hurts the US economy make a stable price for oil, and oil production hasn’t necessarily increased in Iraq since the US went to war. The falling value of the US dollar with rising energy crisis came before the economic downturn and recession (Teslik), and it has been suggested oil played role in causing the downturn. Trouble with Iran, another big oil-producing country, may cause even more problems for expensive oil. Expensive oil would cause more problems for producers and consumers alike.
Oil and the US economy are tied together more than most people think. A big rise in oil prices means trouble for the economy because it costs more to produce and to consume. Fewer goods are made as people must spend more to commute. The relation between oil prices and the economy makes a good indicator for where either of the two is going. For example commodities like oil going up means stock prices are going down, as companies spend more and more. Even though the US economy is less dependent on other countries for its oil supplies than it was decades ago when OPEC and Iran made bans against the US, the threat still remains clear because 99% of US fuel used by cars is based on oil supplies (energy tomorrow). Going into the future most people hope this shocking number goes down along with the amount of oil used to generate energy for the economy. The oil industry employs thousands of people and supports millions of more depending on its energy. Oil prices and the US economy are dependent on each other in every sense.
Churchill, Jason J. Oil Consumption in North America. 2000 25 October. 23 March 2010 .
energy tomorrow. Energy and the Economy. 2008. 2010 .
Goolsbee, Austan. A Country Less Dependent on Oil Is Free to Make Other New Year’s Resolutions. 4 January 2007. 23 March 2010 .
Luft, Gal. Brookings: How Much Oil Does Iraq Have? 1 November 2007. 23 March 2010 .
Mitchell, Cory. Intermarket Relationships: Following The Cycle. 2004. 2010 .
Panzner, Michael. Do Oil Price Moves Signal Trouble Ahead for the U.S. Economy? 16 March 2010. 23 March 2010 .
Teslik, Lee Hudson. Iraq, Afghanistan, and the U.S. Economy. 11 March 2008. 23 March 2010 .