Cost USA Oil Imports and Economic Impact

An Email Today from Lehyina says:

what I want to talk about is my simple observation about the relative cost of net oil imports on the USA economy, which may help to explain why the current level of oil prices does not yet seem to have had excessively painful economic consequences (unless of course you are a trucker, or you happen to live in Zimbabwe, or Philippines etc).
This subject is easier to explain with the attached charts than with just words or a table.
The absolute cost of net oil imports is (Total Oil Consumption – Total Domestic Oil Production) x average net oil import price.
The relative cost is the absolute cost divided by GDP.

Excel SpreadSheet
From the email:

I have wanted to somehow share the charts in the attached excel worksheet for discussion but haven’t been able to work out how to do it.
So often we see remarks in the media of the sort “oil prices are high now but not as high in real terms as in 1980″ or “despite current oil prices the effect on inflation and/or the economy is not very noticeable”.

In the case of inflation there is one recent, very good example of why the inflationary effects of high oil prices are slow to materialise – its because the poor truckers have had to absorb the pain for everyone else.

However, what I want to talk about is my simple observation about the relative cost of net oil imports on the USA economy, which may help to explain why the current level of oil prices does not yet seem to have had excessively painful economic consequences (unless of course you are a trucker, or you happen to live in Zimbabwe, or Philippines etc).

This subject is easier to explain with the attached charts than with just words or a table.
The absolute cost of net oil imports is (Total Oil Consumption – Total Domestic Oil Production) x average net oil import price.
The relative cost is the absolute cost divided by GDP.

Pre-1973 the cost of net oil imports to the USA economy was less than just 0.4% of GDP
After the 1973 oil price spike but pre-1979/80 this cost rose to around 1.5% during which the world’s major economies suffered from stagflation. However, the real economic pain occurred after 1979/80 when the cost of net oil imports to the economy reached 3.4% and there followed economic recession in the early 1980’s. The cost gradually came down with oil consumption contraction and oil price declines and plateaued at a fairly benign 0.7% to 1% of GDP for the next 16 years, which has been a magical period of economic growth.

I am not an economist (I’m an engineer) but I think we will notice real economic turmoil once the cost of net oil imports to the USA economy starts getting close to the same peak of 3.4% of GDP that was reached in 1979. It’s not there yet. Last year it was only 1.5% but my projection for this year is that it will exceed 2% (assuming 2005 Brent oil price averages $55/bbl). I think the crunch will really hit in 2006 if oil prices average over $80/bbl.
But notice that there are FOUR variables which influence this ‘relative cost measure’ (of which oil price is only one of them), i.e. oil consumption, domestic oil production, crude oil price, USA GDP. Check my assumptions for the projection period in the spreadsheet and draw your own conclusions.

I suspect that professional economists would ridicule my simplistic observations but in my career as an engineer I have often found that simple explanations are often nearly as good as or even better than those which are complicated, abstruse or esoteric.

Leigh Yaxley (aka Lehyina)
Petroleum Engineering Manager
Jakarta, Indonesia

Excel SpreadSheet