Oil Shock 2?

With prices at $120 a barrel, Americans are facing an oil adjustment.

ian waldie/ap
Today, rising global demand for oil, a falling dollar, and the possibility of supply disruptions in Iraq and elsewhere have led to increased support for US policies that support alternative fuels.
marty lederhandler/ap/file
slow-rolling crisis: An oil embargo in the 1970s led to long lines at the pump.
david mdzinarishvili/reuters
Today, rising global demand for oil, a falling dollar, and the possibility of supply disruptions in Iraq and elsewhere have led to increased support for US policies that support alternative fuels.

Two years ago a leading economist published a study provocatively titled: "What would $120 oil mean for the global economy?" Answer: a global recession, if the price stayed there for a year.

Now the future has arrived, with the United States and other nations getting a double whammy from both the mortgage crisis and oil futures hovering at $120 per barrel. If oil prices stay stratospheric, the cost of fueling cars and planes could slash US economic growth up to 2.3 percent and global growth by 3.6 percent, says Robert Wescott, former chief economist of the president's council of economic advisers and author of the $120 oil report.

While many energy-security experts worry about a terrorist attack that suddenly crimps global oil supplies and hammers the US economy, Dr. Wescott and other experts say a terror attack is hardly the only, or even the worst, oil threat the nation now faces. "What we are seeing today is more of a slow-motion, rolling oil crisis rather than a sharp shock, yet ultimately we end up with the same sorts of impacts [as a terror attack]," says Wescott, now president of Keybridge Research, a Washington economic-consulting firm.

Unlike the 1970s, when an oil embargo left Americans waiting in long lines at gasoline stations and paying higher prices, today's oil crisis has been stealthy. Its economic impact has been masked by consumers tapping credit cards and home equity to cover the rising cost of energy and some consumer goods.

"We're having a replay of the 1970s without the Arab oil embargo part, so it's been hard for many people to see," says Amy Myers Jaffe, an energy scholar at the Baker Institute at Rice University in Houston.

Even with US airlines cutting flights and SUV sales now tanking, the effects of expensive oil on the American family could be stark, Wescott's report says.

In 2003, with oil approaching $40 per barrel, the average US family spent about $1,900 (4.8 percent of its income) on natural gas, heating oil, and gasoline. But today at the $120 per barrel level, a family will spend about $6,000 a year or about 15 percent of total annual income, Wescott's report predicts.

Compared with the oil crises of the 1970s, the US paradoxically is in a bit better, yet also worse, position. The good news is the US economy is less energy intensive – using only about half the energy it did in the 1980s to produce a dollar of economic growth. That should make it more resilient.

But the bad news is that imported oil has risen to about 12 million barrels a day, about 60 percent of the 21 million barrels the US consumes daily. That financial drain at $120 per barrel is jamming the brakes on the US economy and inflating the trade deficit, economists agree. "The question now isn't whether we're going into recession, it's whether there will be a soft landing ... or we have a hard landing," Ms. Jaffe says.

Nariman Behravesh, chief economist at Global Insight, Lexington, Mass., has done economic projections with oil at even higher prices. While oil at $120 a barrel "makes a mild recession a little deeper," the results of oil at $150 would be much worse with the nation "looking at a fairly serious recession."

But where there is awareness of the problem there is hope. Perhaps nobody knows better what the nation could do – but mostly has not yet done – than Amory Lovins. An American energy guru since the gas lines of the 1970s, he has focused like a laser beam on how the nation can save energy. "What we need to do to cut oil consumption is quite clear," says the cofounder of the Rocky Mountain Institute, an energy think tank in Snowmass, Colo. "But attention keeps getting focused on the wrong things – like subsidies for the oil industry to find more oil. That's the wrong way to go."

Congress's move last year to raise vehicle fuel-economy standards to 35 miles per gallon by 2020 was a good first step – but not enough, he says.

In today's slowly unfolding yet serious oil crisis, Mr. Lovins would slash 9 percent of the nation's oil demand in one year with more than 30 fuel-saving measures. Among them:

•Reduce speed limits to 60 miles per hour for light vehicles, 55 m.p.h. for heavy trucks. Expand HOV-lane use to include alternative fuel vehicles (AFVs), hybrids, and all-electric vehicles.

•Encourage mass-transit use by letting all citizens deduct the cost from their taxes. Require "parking cash-out" so employees can take cash instead of free parking at work.

•Extend federal tax credits for AFV, hybrid, and electric vehicles to many more than the current 60,000 vehicles per manufacturer limit.

•Require one-engine-only idling for jet aircraft waiting to take off. Offer US loan guarantees to airlines upgrading to efficient aircraft and tax credits for replacing heavy interior parts with lightweight materials.

One measure Lovins and Ann Korin, chairman of Set America Free, an energy-security coalition, agree on is for the government to mandate that all vehicles be "flex fuel" burning so Americans can choose alternatives to gasoline. The move, she says, would reduce the nation's exposure to a terrorist attack.

"There's not much we can do today if an attack occurs other than band-aid responses like tapping into the strategic petroleum reserve," Ms. Korin says. "If every garage had a plug-in [hybrid gas-electric] or flex-fuel vehicle, you could still get around. Oil goes up, but we're not held hostage."

The US already has "solutions that can take away the strategic power of oil," adds Robert "Bud" McFarlane, national security adviser to President Reagan in the mid-1980s, referring to ethanol, methanol, biodiesel, and electricity for vehicle propulsion.

Dennis McGinn agrees. A retired vice admiral of the Navy and a national-security expert, he is acutely aware of the fragile oil-supply line and many energy choke points around the globe. Still, he, too, sees a silver lining in this crisis if Americans can wake up and respond to it.

"Our nation has met a whole lot of crises in our history," he says. "This energy and climate-change challenge is perfect for the American public, industry, and government to really do something about. We just need to be honest with ourselves that business as usual can't continue."

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