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How America's Decline Is Linked to Oil

America's rise to supremacy was fueled by control over the world's oil supply. Now, the decline of the U.S. coincides with the decline of oil as a major energy source.

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And this is hardly the only apparent connection.  Because the American economy is so closely tied to oil, it is especially vulnerable to oil’s growing scarcity, price volatility, and the relative paucity of its suppliers.  Consider this: at present, the United States obtains about  40% of its total energy supply from oil, far more than any other major economic power.  This means that when prices rise or oil supplies are disrupted for any reason -- hurricanes in the Gulf of Mexico, war in the Middle East, environmental disasters of any sort -- the economy is at particular risk. While a burst housing bubble and financial shenanigans lay behind the Great Recession that began in 2008, it’s worth remembering that it also coincided with the beginning of a stratospheric rise in oil prices.  As anyone who has pulled into a gas station knows, at an average price of nearly  $3.70 a gallon for regular gas, the staying power of high-priced oil has crippled what, until recently, was being called a “weak recovery.”

Despite the great debt debate in Washington, oil is a factor seldom mentioned when American indebtedness comes up.  And yet the United States  imports 50% to 60% of its oil supply, and with prices averaging at least $80 to $90 per barrel, we’re sending approximately $1 billion every day to foreign oil providers.  These payments constitute the single biggest contribution to the country’s balance-of-payments deficit and so is a major source of the nation’s economic weakness.

Consider for comparison our leading economic rival: China.  That country  relies on oil for only about 20% of its total energy supply, about half as much as we do.  Instead, the Chinese have turned to coal, which they possess in great abundance and can produce at a relatively low cost.  (China, of course, pays a heavy environmental price for its coal dependency.)  The Chinese do import some petroleum, but considerably less than the U.S., so their import expenses are considerably smaller.  Nor do its oil-import costs have the same enfeebling effect, since China enjoys a positive balance of trade (in part, at America’s expense).  As a result, when oil prices soared to record heights in 2008 and again in 2011, Beijing experienced none of the trauma felt in Washington.

No doubt many factors explain the startling rise of the Chinese economy, including lower costs of production and weaker environmental regulations.  It is hard, however, to avoid the conclusion that our greater reliance on oil as it begins its decline has played a significant role in the changing balance of economic power between the two countries.

All this leads to a critical question:  How should America respond to these developments in the years ahead?

As a start, there can be no question that the United States needs to move quickly to reduce its reliance on oil and increase the availability of other energy sources, especially renewable ones that pose no threat to the environment.  This is not merely a matter of reducing our reliance on imported oil, as some have suggested.  As long as oil remains our preeminent source of energy, we will be painfully vulnerable to the vicissitudes of the global oil market, wherever problems may arise.  Only by embracing forms of energy immune to international disruption and capable of promoting investment at home can the foundations be laid for future economic progress.  Of course, this is easy enough to write, but with Washington in the grip of near-total political paralysis, it appears that continuing American decline, possibly of a precipitous sort, could be in the cards.