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The Costs of US Oil Dependency

Paper prepared for the National Commission on Energy Policy.

1. Introduction

Energy security may broadly be described as a state of affairs characterized by conditions and policies that safeguard the health of the US economy against circumstances threatening significant short- or long-term increases in energy costs. It is a concept with many dimensions, only one of which.the problem of dependence on a world oil market characterized by substantial price volatility and exercise of market power.will be addressed in this paper.1 Even the energy security aspects of oil dependence are numerous: some are geopolitical (e.g., efforts to promote the stability of oil-exporting regimes), while others revolve around geological or technological issues (e.g., the payoff from R&D investments to expand domestic liquid fuel reserves). However, the topic addressed here.the economic costs of US oil consumption and import dependence.occupies a central place in energy security policy analysis and debate. The exposition proceeds as follows.

Section 2 sets the scene with a brief statistical background, including trends in US petroleum consumption, imports and where they come from, oil prices, the energy-intensity of GDP, and the world distribution of known oil reserves. We also discuss the potential power of OPEC to manipulate world oil prices, projected trends in US oil dependency, the effect of oil prices on aggregate economic activity, and the potential role of the Strategic Petroleum Reserve in mitigating against price shocks.

2004-11-17 00:00:00

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