Why the U.S. is now more resilient to oil price shocks

The U.S. economy is much less oil-intensive than it used to be, producing more economic value with far less oil use today than in the past.

Gas prices are up, but other forces may limit the economic harm to the U.S. [Images: Adobe Stock]

Oil is a global market, so when prices rise in one place, they rise everywhere. The current war against Iran has already raised oil prices significantly.

Mideast oil production has been slowed by efforts to close the Strait of Hormuz, a key route for oil tankers from the Middle East to the rest of the world, as well as by attacks—and fears of attacks—on oil production, storage, and shipment installations.

This war has also disrupted the flow of liquefied natural gas from Qatar, which controls almost 20% of the global market. That also affects the world economy and supply chains. Shortages of natural gas affect production of fertilizer and aluminium, as well as other key materials.

As a professor who has been studying oil price shocks for two decades, I’m often asked about the effects of rising oil prices on the U.S. economy. The answer to that question has changed over the past two decades.

The global economic picture

Countries that import much of their oil have to pay other countries for that imported oil.

That was a problem for the U.S. back in the 1970s through the early 2000s. The U.S. sent billions of dollars a year abroad to oil-producing countries in the Middle East, Africa, and Latin America. That money built up other countries’ economies or sloshed around as financial surpluses that fueled financial market exuberance and asset bubbles that could suddenly pop.

Oil imports increased the U.S. trade deficit in the 1970s and beyond. And as a result, U.S. industries suffered from high energy costs, which forced closures of major U.S. steel plants and iron and copper mines. Falling purchases of cars and other durable goods also stimulated worker layoffs.

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