October 31, 2008

Costs of Oil Imports

In 2007, the United States spent $246 billion on oil imports and another $82 billion on imported refined petroleum products, making for a grand total $328 billion.

The cost rose more in the first seven months of 2008, with the total cost of oil and refined imports products at $283.6 billion. The bill was paid for by the "recycling" of dollars into US Treasury debt by the oil exporters.

If you were to ask most Americans, the big problem with high oil prices is high gas prices. They care about that. Presidential approval ratings have been shown to rise and fall inversely with the price of gasoline.

But there are two other very important aspects of this import bill.

One is its significance to the the US role in the world financial system. The US current account deficit stayed stubbornly high in the first two quarters of 2008 because of the rising cost of oil; the movement of investment funds into the commodity markets, which changed their character, contributed to the sharp spike in oil in 2008; movement into hard assets, of which oil was a beneficiary, was in part a response to market distrust of paper assets, so the price of oil was in part a function of doubts over the value of paper currency. Oil influences, and is itself influenced by, the financial system.

The financial deficit is also a geopolitical deficit. The obverse fact of high oil import bills is that nations with which the United States has embittered relations were often the biggest immediate gainers from a rising oil price: Iran, Venezuela, and Russia were especially important in this regard. Both presidential candidates exclaimed in 2008 against "sending $700 billion a year to tyrants and dictators for their oil," as Obama put it in words closely echoing McCain's.

Both McCain and Obama mistated the facts. Had the price of oil held in the three figures, the total bill could well have amounted to $700 billion, but it subsequently fell. Most US remittances, moreover, do not go to "dictators and tyrants," but rather to such decent folks as Canadians.

Still, it is a very big yearly bill. And ultimately the world price of oil, to which America contributes by its massive consumption, does mean that US oil imports replenish the coffers of states not exactly friendly, as this chart from Matt Simmons shows.

Another chart from Simmons estimates the impact of successively higher oil prices on the 13 poorest oil producers. He sees that as a powerful impetus to development, but it is also indicative of the power shift to petro states such as Russia, Saudi Arabia, and Venezeula that a high oil price brings.

Oil consumption has financial consequences. It has geopolitical consequences. Those should count as costs of our acknowledged "addiction."

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