A Good Lesson in ‘70s Oil Crisis
A barrel of oil that sold for $10.35 last December now costs close to $26, and the price could go higher still. Rising world demand for energy, led by the recovering Asian economies, is one reason. The OPEC oil cartel’s production cuts in March, which reduced world supplies by about 7%, is another. This week Iraq agitated oil markets by threatening to halt its exports unless the U.N. Security Council agreed to lift fully the trade embargo it imposed in 1990 after Iraq invaded Kuwait. That threat may quickly be withdrawn, but the spasm of concern it prompted is evidence of how volatile the market can be.
It’s unlikely that cheap oil will reappear any time soon. What’s interesting is how easily the U.S. economy has been able to handle the higher costs, at least for now. Gasoline prices have gone up, nowhere more so than in California, and airlines are seeing their profits reduced by fuel costs. But the overall impact of the 250% rise in prices in less than a year is in no way comparable to the destructive shocks of the 1970s. A big reason is the changing nature of the American economy. As Federal Reserve Chairman Alan Greenspan puts it, the nation’s economic output is getting lighter, with software replacing steel, with services becoming more important than manufacturing.
The U.S. Energy Department offers some numbers to illustrate the point. Since 1973, the amount of energy needed to produce an inflation-adjusted dollar’s worth of goods and services has fallen from 14,600 British thermal units to 7,700 BTUs. Oil, which is imported now in even greater volume than in the 1970s, simply plays a lesser role in determining the health of the economy. Higher prices will mean some slowing in the rate of growth, but, at the same time, a cooling economy could keep interest rates from rising.
None of this argues for complacency. The United States now depends on foreign suppliers for half the oil it uses. Higher prices add significantly to a trade imbalance that is already dangerously lopsided, and that unchecked threatens the value of the dollar. And higher prices inescapably impact household spending, especially at the gasoline pump and in heating costs. The more that Americans spend overseas on oil and petroleum-based products, the less they have to spend on goods and services at home.
The oil shocks of the 1970s threw the world into deep economic recession. They also led to a new emphasis on using energy more efficiently and on finding alternatives to foreign oil. The conservation ethic hasn’t been abandoned, but in recent years it has been neglected. Remembering the harsh experiences of the near past is a good way to keep them from reappearing in the future.
