Why the U.S.’ Oil Dependence is Bad for the U.S. Economy

Energy policy — or more specifically U.S. oil dependence — comes and goes in media focus. Its prominence usually increases in direct proportion to the current price of oil or gas. In addition, there has been a growing movement called the “peak oil” movement, which argues world supplies are actually at or near their highest and will continually decline from here on out. While I can’t comment on the veracity of peak oil’s claims, I can state without a doubt that the U.S.’ national energy policy — and specifically our oil dependence — is economically disadvantageous.


1. The U.S.’ dependence on oil has had a negative impact on the U.S. trade deficit. In September 2006, the San Francisco Federal Reserve issued a paper titled Oil Prices and the U.S. Trade Deficit. It concluded:

Oil prices have almost quadrupled since the beginning of 2002. For an oil-importing country like the U.S., this has substantially increased the cost of petroleum imports. International trade data suggest that this increase has exacerbated the deterioration of the U.S. trade deficit, especially since the second half of 2004. One factor can explain this evolution: The real volume of U.S. petroleum imports has remained essentially constant. One explanation for why the demand for petroleum imports has not declined in response to higher prices comes from a model in which firms are fairly limited in their ability to adjust their use of energy sources, such as oil, in the short term.

The report’s conclusion was not widely reported, although it should have been. Simply put, the U.S.’ dependence on oil has increased the trade deficit.

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