I came across an old letter, addressed to PhD Economists, from the Union of Concerned Scientists. It was a letter pushing for an expansion in US CAFE standards (i.e. mandating better fuel mileage in the new vehicle fleet). Among the many claims it makes includes:
Our continued dependence on oil puts our economy at risk from the effects of oil price volatility and energy insecurity. Oil price spikes were associated with most of the U.S. recessions in the past 40 years. The United States currently sends $1 billion each day to foreign countries to pay for oil and other petroleum products–that is equivalent to more than half of the average daily U.S. trade deficit over the last decade
Whether we are an importer or exporter of oil says nothing about how sensitive our economy is to oil price fluctuations. But I guess it would be too hard to make that point to a group of Economics PhDs. Oil is sold on world markets and is priced on world markets and so long as this is the case, it doesn’t matter what our net foreign exchange position is. Of course, in a global market, if we allow trade it is likely that international producers are, at the margin, more efficient producers – so that energy is likely cheaper than if we were to ramp up production of our own resources (for example).
There are several additional observations one might make here, but let me focus on two obvious ones.
- It would take a little bit more than CAFÉ standards to make us truly oil independent. Unless we raised the CAFÉ standard to ∞ we would still be dependent on global oil markets. No amount of fuel efficiency improvement can alter than unless we eliminated our oil consumption entirely.
- I don’t deny that oil price spikes have been related to US real economic shocks. If that is true, then wouldn’t it also be the case that “oil price shocks” of the positive variety (i.e. lower prices) have and can produce periods of economic expansions? If not, explain the asymmetry. By the way, over the previous 40 years, a period of 480 months, the US has been in recession for a total of 72 months. That makes for a total of 15% of the time we were in recession, and therefore 85% of the time we are in expansions. So would it mean that by eliminating this volatility, we’d eliminate the volatility in expansions too?