Oil Surges Past $70 a Barrel

On the same day that oil prices surged past $70 a barrel, the S &P 500 surged by 1.74%, with the rise fueled by a perceived end to interest rate hikes. The ever-escalating crude oil prices did not put a damper on the festivities. But why not?Part of the reason is surely that rising oil prices are old news. While concerns about supply from Nigeria and saber-rattling over Iran’s budding nuclear program are fairly recent, the real driver of oil price hikes is the increasing demand from China and India. That’s all background, not concerns that spook investors today.Still, yesterday’s record $71.35 a barrel price for oil futures on the New York Mercantile Exchange means that the price per barrel is within 11% of the average price in 1980 and 1981, the high-water marks for oil prices,even adjusting for inflation. There are, however, three big differences between the oil crisis of the late 1970s and early 1980s and the situation the American economy faces today.On the positive side, America spends much less of its GDP on energy than it did a generation ago. According to the U.S. Energy Information Administration, in 1981, the nation spent 13.7% of its GDP on energy. Last year, despite high oil prices, it spent 8.5% of its total output on energy. Even if oil prices wind up a third or more higher than they were last year, the share of total in come spent on energy won’t approach the levels of the 1981 energy crisis.In 1981, about 45% of all energy spending was for oil. Now, oil accounts for less than one-third of energy spending. Natural gas, coal, and even nuclear energy have taken up some of the slack. So when the price of oil increases, the effect on overall energy spending is not as dramatic as it was in that earlier era.Slightly more troubling is that at current price levels, overall spending on oil nationwide will likely set an inflation-adjusted record this year. The Energy Information Administration projects that America will consume about 15 million barrels of oil a day this year. That’s about 20% more than Americans consumed in the early ’80s. So the overall bill for oil should be near $385 billion. That’s slightly higher now than it was in 1981, even if prices are still not at energy crisis levels.But the real problem the country faces now is that it imports a much higher percentage of its oil than it used to. The EIA says America imported 60% of its crude in 2005, compared to just 38% in 1981. So roughly $231 billion will be sent overseas to pay for oil. That’s a healthy chunk of the $720 billion-plus trade deficit.Even with more being spent on oil and more being funneled overseas, the much larger American economy is absorbing the blows, albeit by building debt to ever-higher levels.

Oil Surges Past $70 a Barrel

Oil Surges Past $70 a Barrel

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