The Current Oil Crisis And How It Is Affecting The Economy

.. ce in itself would not make a country vulnerable (Aaron, 2000). The problem that arises in situations that involve dependence is that no matter the degree of dependence, sudden disruptions of supply can occur. Furthermore, a country that is heavily dependent upon a good or service is extremely vulnerable to economic catastrophe. Because of the market for oil and the countries that produce it locally, some degree of dependence is inevitable.

To combat this vulnerability, a country must minimize its vulnerability at any moment of time. Diversity of supply has to be front and center (Aaron, 2000). For the United States, oil must be acquired from as many sources as possible. The most secure supply source, all things being equal, has to be within the United States (Aaron, 2000). If the United States continues to rely upon foreign oil sources too heavily, the doors are left wide open for oil crisis in the future and the current situation will have difficulty culminating. The recent conflicts in the Middle East Just like a decade ago, the current conflict in the Middle East is threatening to end the longest-running economic expansion in United States history.

The events that take place in the Middle East have a great impact upon the U.S. economy and the price of oil worldwide. The recent events that transposed have caused conflict between the Israelis and the Palestinians. According to Barbara Slavin in USA Today: It has been only two weeks since Israeli opposition leader Ariel Sharon visited Jerusalem’s disputed Temple Mount to underscore Israel’s claim to a site deemed holy by Jews and Muslims alike. But in days of rage that followed, as Palestinian riots swept the West Bank, “the conflict has been transformed from a nationalist one to an ethnic, religious one that is much harder to control,” says Shibley Telhami, a Middle East expert at the University of Maryland.

“It’s automatic now that most of the passion is going to be anti-American. We are entering a period of huge uncertainty.” This current situation suits Saddam Hussein interests perfectly and allows him to “attack” Arab leaders without raising a finger. Some have speculated that Iraq might take advantage of the current tight market to turn off the tap of more than two million barrels a day, thereby throwing the industrial world into a financial crisis (Slavin, 2000). These events leave the rest of the world on the edge of their seats in anticipation. This conflict has done much to raise the price of oil worldwide.

The Affect of the Oil Crisis upon the Economy Since 1970, sharp increases in the price of oil have always been followed by economic recession in the United States (Blake, 1997). The impact on the economy of U.S. dependence on foreign oil is great. Because the U.S. imports over half its oil, the energy efficiency of the nation is steadily decreasing.

In 1996, the U.S. sent 60.13 billion dollars overseas to pay for fossil fuels, funding foreign economies rather than strengthening American communities (Blake, 1997). This loss in energy efficiency will ultimately undermine and weaken the economy. One important factor to consider when looking at economic stability is the United State’s share of oil in the gross domestic product. For example, before the U.S. ended price controls in 1979, oil in the gross domestic product (GDP) was 8.7% (Aaron, 2000).

Because of this it is not surprising that until 1990, every time oil went up, the U.S. went into economic recession. But a dramatic rise in oil prices in 1999-2000 has not led to a measurable decline in the growth of the GDP. This is because currently, the share of oil in the GDP is only about three percent (Aaron, 2000). Therefore, one can surmise that oil has a smaller affect upon the nation’s economy than in previous years.

According to Larry Goldstein, the director of the Petroleum Research Foundation: I think we’re less vulnerable today to a political disruption in supply in part because oil is less important to the United States economy. However, while the economy has tried to insulate itself from oil price shocks, it is still not fully immune (Aaron, 2000). In late August 2000, oil prices which had dipped below thirty dollars per barrel began to rise again and the Dow Jones Industrial Average slipped toward ten thousand, a level not seen since March. The United States economy is cushioned more against a possible recession than it was a decade ago but, higher oil prices combined with a plummeting stock market could have a significant impact (Slavin, 2000). Coping With High Oil Prices: A Summary of Options With the continued rise of petroleum, the Government and other sources have begun to look at possible solutions to this problem. The impact of a virtually doubling in residential home heating costs along with sharply higher gasoline prices has had an “adverse economic impact” that seems to justify drastic measures (Burt, 2000).

When considering possible solutions to the oil crisis, it is important to look at a verity of options that would be beneficial. 1. Drawdown of the Strategic Petroleum Reserve (SPR) This option has been vigorously advocated by some, though pressure for an immediate drawdown has diminished since crude prices began to soften after the OPEC producers met. The Strategic Petroleum Reserve was authorized in 1975 to create a below-ground reserve of crude oil that could be tapped in the event of an interruption in supply, comparable to the experiences of 1973-74 and 1979-1980, when oil supplies were interrupted or declined due to international developments (Bamberger, 2000). The drawdown authority has been expanded in recent years to provide for a drawdown if a supply shortage led to price increases that appeared to threaten adverse economic consequences (Burt, 2000).

The Clinton Administration has opposed a drawdown of SPR oil, arguing that the present situation does not fit the sort of supply problem for which the Strategic Petroleum Reserve is intended (Bamberger, 2000). The Administration had indicated that the SPR was an option it might turn to if OPEC did not agree to boost production adequately. Following OPEC’s commitment on March 28, 2000, to boost production, crude prices began to decline to the mid-twenties per barrel. Later in the year, however, crude prices again began to climb into the high-twenties and low-thirties (New Straits Times, 2000). With this sudden jump in prices, the Clinton Administration called for the drawdown of a large portion of the Strategic Petroleum Reserve.

Although this action did not help for an extended period of time, the SPR is a viable option in combating oil crisis (Bamberger, 2000). 2. Decrease in Motor Fuel Excise Tax After the meeting of the OPEC producers on March 27, 2000, policymakers focused on possible tax options to address the recent spike in petroleum prices, including a decrease on the payment of gasoline and diesel fuel excise taxes (Bamberger, 2000). Prospects for a reduction in gasoline taxes dimmed on April 6, 2000, when the Senate passed, 65-35, an amendment to the budget resolution expressing the sense of the Senate that fuel tax revenues should continue to be used for highway construction and rehabilitation. On April 12, a motion to proceed to debate was defeated (43-56) (Bamberger, 2000). Legislation to reduce or lift gasoline taxes was also introduced in the House in late March, but this particular initiative, for the moment, appears unlikely to receive further attention unless crude prices spike sharply once again.

Although these initiatives seem rather unlikely, the proposed reduction in the tax of gasoline, diesel, and kerosene would not actually cost the Government anything. In order for this to be achieved, the estimated revenue loss would be made up from general revenues so that the Highway Trust Fund would not loose money (Burt, 2000). Through this proposed decrease in Motor Fuel Excise Tax the burden of overpriced petroleum would be lightened. 3. Ban Alaskan Oil Exports In 1995, against a backdrop of low oil prices and plentiful global supply, a bill was passed permitting North Slope crude exports in Alaska. Exports began and continued without expression of concern or market disruption until the current round of price and supply difficulties developed (Kumins, 2000). Between 1995 and 1999, Alaskan oil output declined from 1.50 million barrels per day to 1.05 mbd, greatly diminishing any West Coast production surplus that might have once existed. Exports during 1999 averaged 74,000 barrels per day, or about 7% of Alaskan production (Bamberger, 2000).

Half those exports were to Korea, 35% to Japan and 12% to China. The total amount exported represents less than 3% of regional consumption, but could currently be contributing to price disparities on the West Coast (Bamberger, 2000). Highly inelastic oil markets can experience large price swings in response to small changes in supply. Two bills were introduced on March 16, 2000, which would suspend or prohibit the export of Alaskan oil. The presumption is that this supply, roughly 74,000 b/d in 1999, would be directed to the West Coast market where tight supplies have contributed to price increases (Bamberger, 2000). The bills would suspend exports until the President determines that shortages and related price impacts are no longer a concern, and would reinstate the export ban on Alaskan crude. 4.

Low Income Home Energy Assistance Program (LIHEAP) The Low-Income Home Energy Assistance program, originally established in 1981 and reauthorized several times, is a block grant program under which the federal government gives states, the District of Columbia, U.S. territories and commonwealths, and Indian tribal organizations annual grants to operate multi-component home energy assistance programs for needy households (Bamberger, 2000). This program is designed to reimburse needy consumers who have responded to higher oil prices and have made rational decisions, including being sensitive to conservation (Goldstein, 2000). The President sent Congress an emergency supplemental request for $600 million which would provide additional emergency funds for LIHEAP through the end of this fiscal year (Bamberger, 2000). Action has become stalled on the measure, but if passed, would help those who need help most.

5. Energy Alternatives for Heating Oil As winter approaches, it is clear that the heating oil crisis is in full swing. During the latter parts of the previous winter the heating oil price rose by eighty-four percent in six weeks (Knight-Ridder, 2000). This coming winter promises to be even more severe and will have a greater negative impact upon the economy than last year’s. According to Carmen Armenti, the Board of Public Utilities commissioner: We seem to find ourselves in this situation every few years, there needs to be an ongoing dialogue with the public, industry, and government in order to reach a solution. With this ongoing cycle and the severe costs over the past year, much of the population has turned to alternative heating sources (Johnson, 2000).

In the past, although there were fluxuations in the price of heating oil, it still remained more cost efficient than natural gas. But with the recent developments in the Middle East and the continued rise in price of crude oil, more and more consumers are switching to natural gas (Johnson, 2000). Many of the new homes being constructed are utilizing natural gas as a source of heat. This recent trend has helped because the surging oil prices have less affect on the economy as a whole than in the past. As of now, a mere thirty percent of residential customers heat their homes with oil (Johnson, 2000).

If these trends toward natural gas continue, our nation will be in superior shape to face a prolonged oil crisis. 6. Electric Vehicles Analysts at Cambridge Energy Research Associates recently reported that high gasoline prices in the U.S. have revived interest in electric vehicles (Evans, 2000). However, the organization noted that it would take more than soaring gas prices to move American motorists away from conventionally powered vehicles. Motorists will not change to more efficient energy cars, not unless gasoline prices stay this high for a long time (Evans, 2000).

Industry analysts have said that electric vehicles will have to cost significantly less in order to match the style and safety of conventional cars. However, with gasoline prices rising well above two dollars in parts of the country earlier this year, drivers could be facing an end to the days of cheap fuel and the beginning of the electric vehicle (Burt, 2000). Because electric and hybrid vehicles are rather expensive, car manufacturers have experimented in hopes of finding an affordable solution. The Advanced Lead Acid battery Consortium will carry out major surgery to Honda’s prestigious Insight hybrid electric coupe which, if successful, could dramatically reduce the manufacturing costs of all future hybrid cars and quicken their introduction (Cole, 2000). The impact on petrol consumption could be enormous. This proposed reconstruction of Honda’s hybrid will involve removing the car’s small but extremely expensive nickel hydride pack and replace it with a designed lead acid battery (Cole, 2000).

The nickel hydride battery that is now in the hybrid is the same battery chosen to power second generation mobile phones. This battery stores more than twice the energy of a comparable lead acid battery but costs ten times as much (Cole, 2000). Not only will the lead acid battery be affordable, but it will also last. Another project underway in the fight for alternative fuel vehicles is the fuel-cell car. Although there are currently a wide array of problems with this vehicle, improvements are being made and there are several already in production. A fuel cell works by chemically combining hydrogen with oxygen from the air (The Economist, 1999). The result is energy in the form of moving electrons, which is used to power an electric motor; and water, the fuel cell’s principal waste product. That the GM-Toyota deal and the trial cars were wheeled out just before “Earth Day” (April 22) was probably not a coincidence (The Economist, 1999). Water, after all, hardly counts as a serious pollutant.

With the continued development of this infinitive design, the transportation industry as we know it could be turned upsidown and our reliance upon oil could finally be broken. The dawning of the electric car age is nearly here and once it comes, the nation will never go back. What is the Best Solution to the Oil Crisis? There is not a single solution to such a complex problem but much can be done towards its resolve. Each of the possibilities that I listed above are viable solutions to solving the oil crisis. But what is the best solution? In order to answer this important question one must first have a vision of where the oil industry is headed.

I believe that a new age is upon us. Throughout history there has been ups and downs in the price of cruse oil, but now this price has risen to an unprecedented level and is remaining steady. This new price trend is exactly what the country needs in order to initiate invention. As electric and hybrid cars become increasingly affordable, the general public will begin to accept them as standard. Therefore, I believe that cars with alternative fuel sources are the best solution to the oil crisis.

As more and more electric and hybrid cars enter the market, the price of oil will be driven down due to a lack of demand. For the first time in history this really won’t matter. Once alternative fuel sources are established, there will be no turning back. This will be the greatest moment in the history of U.S. energy: when we no longer will rely upon petroleum as a fuel source.

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