Spiking oil prices added $1.2 trillion to the federal debt over the past decade and could mean nearly five times as much by 2040, according to a new report that ties U.S. economic performance to the cost of crude.
The analysis, conducted by economists at the American Enterprise Institute and Keybridge Research, says the United States’ rigid dependence on oil to fuel cars and trucks meant that Americans kept buying the stuff from 2002 to 2012, even as the average price per barrel jumped from $22.61 to $101.16.
At the same time, the federal government also was paying more to buy fuel for its own vehicle fleet, including Defense Department equipment. And because the U.S. still gets much of its oil from other countries — net oil imports were about 7.4 million barrels per day in 2012 — America’s hunger for oil contributed to the nation’s trade deficit.
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Report authors Robert Wescott of Keybridge Research and AEI’s Phillip Swagel, noted that high and volatile oil prices generally translate to slower growth, with lower income levels, lower corporate profits and lower tax revenue, even as the government spends more on social programs to support the poor and unemployed.
The end result is “a trillion dollar budget problem,” Swagel said.
The organization that commissioned the study, Securing America’s Future Energy, aims to pare the United States’ reliance on oil. The group’s CEO, Robbie Diamond, says the analysis proves that moving to other energy sources would help the nation’s bottom line.
“America is currently held hostage by its dependence on oil,” Diamond said. “As discussions about the debt ceiling and government spending occur over the coming months, our political leadership should recognize that reduced oil dependence would make a meaningful contribution to the nation’s fiscal health.”
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The report says that without changes, the United States’ reliance on crude oil could add an additional $5 trillion to the nation’s debt by 2040. And the negative effects, the report authors suggest, continue whether that oil comes from inside U.S. borders or from other countries.
“While increased domestic supply would put some downward pressure on oil prices, the changes would likely be small, because oil prices are determined in a global market,” Wescott and Swagel write. “That means that the inflation-related impacts on the budget that oil prices have had in the past could be repeated.”
“Oil price increases and volatility would continue to hurt the budget through reduced economic growth,” the economists conclude.
But the study paints a different picture if the U.S. moves to alternative energy sources and transportation options, including electric and natural gas-powered vehicles. The gross domestic product would get a modest 0.5 percent lift from “increased reliance on alternative fuels and improved fuel economy,” the report says, but higher real economic growth would translate to an additional $378 billion in federal revenues in 2040.
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