Attack on Saudi Oil Poses Little Threat to U.S. Economy

US Shale Production Karen Bleier AFP Getty Images
Karen Bleier/AFP/Getty Images

The attack Saturday on critical Saudi Arabian oil production facilities sent the price of crude oil soaring but it is unlikely to weigh on the U.S. economy in the way that past trouble in the oil-rich region might have.

Thanks to a massive increase in domestic shale oil production and huge fuel efficiency gains, the U.S. is no longer as dependent on foreign oil as it once was and higher oil prices are no longer necessarily bad for the U.S. economy.

While it is still true that higher oil prices hit consumers at the gas pump and could squeeze businesses heavily reliant on trucking to ship products, higher prices also can spur hiring and investment by domestic oil producers. In recent years, domestic oil producers have been a major source of capital spending in the U.S., with the effects rippling out through the economy and creating jobs in machinery manufacturing and demand for steel.

Some economists now estimate that a $20 a barrell increase in the price of oil might add to gross domestic product over twelve months even if it temporarily caused a slump in non-energy consumer spending.

Cars and trucks now burn far less gasoline per mile than they once did. That means household spending feels less of a bite when gas prices climb. The old rule of thumb for economists was that gas became a drag on the rest of the economy at four dollars per gallon. Now that figure might be as high as five or six dollars. The national average price is now $2.54 per gallon, according to AAA, which means there is a long way to go before the price of gas starts hurting the economy.

Energy consumption now accounts for a much smaller percentage of household spending than it once did. According to Bank of America analysts, spending on energy accounts for around 2.5 percent of total household consumption, compared to 8 percent in the “oil crisis” era of the 1970s.

 

Still, the Saudis remain the world’s biggest source of excess capacity, able to supply as much oil to the market as it will bear at the price the Saudis want to be paid. Anything that diminishes the ability of Saudia Arabia to raise production to meet demand will likely result in higher prices. And the more tensions mount in the area, the more speculators will bid up the price of oil futures contracts.

But the steepest economic costs will be felt outside the U.S., particularly in Asia. China and Japan, in particular, are thought to be highly vulnerable to an oil price shock.

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