How Oil Affects American Consumers, Research Paper Example

U.S is one of the biggest energy consumers in the world because it is the world’s largest economy, its residents enjoy one of the highest disposable income levels, and the country is a world leader in my industries. Thus, any movement in oil prices has significant impact on the U.S. economy as well as individual citizens. Oil is a widely used commodity in the U.S. due to its wide applications such as in transportation, heating, and industrial processes. The highly cyclical nature of oil prices in the last few years has forced Americans to rethink their consumption habits and rethink their energy budgets so as not to threaten their long-term financial security.

The fluctuations in oil prices have also been due to rising demand from emerging economies such as China which eclipsed U.S. to become the world’s biggest energy consumer in 2010 (Oster and Swartz). In addition, the recent political turmoil in Middle East has also disrupted supplies and increased future uncertainties regarding oil prices. The uncertainty is also due to the fact that Middle East controls a substantial portion of global oil supply and the area is politically unstable as compared to the west.

Oil consumption in the U.S. average almost 3 gallon per capita per day (Green Living Tips) which means each U.S. resident consumes over a thousand gallons each year. Each penny increase in the cost of a gallon of gas costs the economy more than a billion dollars a year and this amount leaves the consumers who might have spent it on food and recreation, contributing towards economic growth and goes into the pockets of oil companies. According to Bernard Baumohl, chief global economist at the Economic Outlook Group, a trend of rising oil prices may induce significant changes in the consumption behavior of the of the consumer. This should be a cause of concern because consumer spending accounts for approximately two-thirds of the economic activity in the U.S. (Alden and Bosker, Oil Prices Squeeze Small Businesses As Transportation Costs Rise). The U.S. economy benefits when its residents consumer more this is why the government encourages the public to spend more during recession.

The importance of oil to the U.S. economy could be judged by the fact that economists became concerned during the Libyan crisis that the crisis could impede economic recovery in the U.S. We know from economics that future expectations do impact decision making processes by the individual citizens, investors, and the companies. If the oil prices remain high for a considerable period, businesses also delay hiring more workers (Alden, Analyst: Rising Oil Prices ‘Primary Threat’ To U.S. Economy As Libyan Violence Mounts) as well as incurring capital investments.

A rise in the price of oil results in lower demand for oil by the consumers due to the economics law of supply and demand. This is because a rise in price means fewer consumers are able to afford their previous consumption habits so they respond by lowering their demand. If they do not do so, they will have to sacrifice some other needs because oil will now account for a greater portion of their aggregate spending. Similarly, the demand for gas-guzzling cars such as SUV’s will also go down because overall cost of ownership goes up. Big cars such as SUVs are less efficient in terms of energy consumption and new buyers in the car market may prefer options with higher energy efficiency such as hybrid cars. G.M. announced in 2008 that it would slash production of big trucks and SUVs by 140,000 that year, resulting in a possible loss of 3,550 workers and elimination of assembly shifts at four plants. The president of G.M.’s North American operations, Troy Clarke specifically cited rising fuel prices as one of the primary reasons behind the decision (Bunkley). Buying more fuel-efficient cars will allow the consumers to get more mileage per gallon. This is why Americans increase their demand for fuel-efficient cars when they are worried about rising oil prices and this may explain why Toyota Prius won over Americans upon its introduction.

It seems that hybrid popularity will continue to grow over time because American consumers may desire to get rid of the uncertainty that oil prices pose. In fact, Toyota’s vice president of sales for U.S. indicated in late 2010 that the company hopes to end the current decade with Prius becoming the most popular model and overtaking Camry in terms of sales volume. Toyota plans to double the number of hybrids it sells in North America by 2015, to 400,000 vehicles per year and its hybrid plans even include vehicles such as trucks and not only cars (Hybrid Cars).

When there is a price increase for a particular commodity, the demand for its substitutes increases. This is because substitutes allow the consumer to meet more or less the same needs. One of the substitutes to owning a vehicle is public transportation even though it may be less convenient. Thus, a rise in oil prices will persuade more Americans to opt for public transportation to save transportation costs. Alternatively, Americans may also look into carpooling because it allows them to share costs while still providing them with a comfortable transportation.

Most Americans may find it difficult if not impossible to forego vehicle ownership even if oil prices continue to rise. Public transportation networks are well established in most big cities but that is not always the case in mid-size and smaller cities. This is why the demand for oil is price inelastic because it is one of essential goods in America and this may explain why rise in oil prices also increase profits for oil companies even though the overall demand goes down. When a good or service has inelastic demand, it means that the rise in price increases overall profit of the supplier because even though demand falls, the percentage decrease in demand is less than the percentage increase in price. Thus, Americans may scale back on gas consumption but they will lower their demand by only so much. In addition, most Americans will also take fewer shopping trips.

Another impact of rising oil prices may be an increase in internet or online shopping. This is because many sellers now offer free shipping and consumers can save in fuel costs by shopping online. Internet commerce has come a long way in improving user experience and in addition, almost everything can be bought online and often at competitive prices. The fact that online shopping makes it possible to do price-comparison cheaply and quickly, also adds to its allure during difficult economic times.

The rise in oil prices doesn’t only affect individual Americans but also economic entities. Energy expenses are a major portion of total production costs for many American organizations and a rise in oil prices also translate to significantly higher production costs. The consequence is declining profits, lower purchasing power, and lower investment activity levels in the commercial sector. Rising production costs and declining profitability may force companies to lay off workers. Rising oil prices will also indirectly contribute towards higher unemployment levels as Americans will lower their demand for goods and services.

But not all effects of rising oil prices are negative. One positive impact is greater determination of the U.S. government and the private enterprise to reduce reliance on oil. The government wants to reduce dependence on oil because not only it endangers national security but also decreases U.S. political influence in the world. The private sector has been investing in alternative technologies such as solar power, wind power, and nuclear power etc. because they know there are huge economic opportunities in finding a reliable solution to the U.S. dependency on oil. Even the U.S. government has been encouraging the private sector by offering incentives and grants. U.S. government passed The Energy Independence and Security Act of 2007 that sets a target of 36 billion gallons of biofuel by 2022, a fivefold increase over the 2007 production level (Huffaker).

It is also possible that recent fluctuations in oil prices turn out to be blessings for the U.S. in the long term. The private sector in the U.S. has been heavily investing in alternative energy technologies and if one of these technologies turns out to be the best alternative to fossil fuels, it will allow the U.S. to become the major provider of energy technologies to the rest of the world. It will also increase U.S. political leverage because OPEC and oil producing countries won’t be able to blackmail anymore. It will also significantly lower the cost of living for an average person in the U.S. given the fact that gas consumption constitutes a significant portion of total income for many Americans. Another benefit will be lower environmental pollution and improved U.S. social image.

If oil prices remain low, it may take away the incentive to invest in alternative energies and will ensure long term U.S. dependence on oil. This is why Saudi prince and Billionaire investor Al-Waleed Bin Talal expressed his desire for lower oil prices so that the United States and Europe don’t accelerate their efforts to lower their dependence on Saudi oil. The Saudi prince admitted that the higher the oil prices are, the greater will be the incentive for the West to find alternatives to oil (CNN).

It is clear that oil prices have significant impact on the U.S. economy on both microeconomic and macroeconomic levels because U.S. is the world’s largest economy and in addition, oil doesn’t have any close substitutes. Moreover, many factors influencing the oil prices are outside the control of the U.S. which also adds to uncertainty. The average American responds by lowering his demand for oil as well as finding other ways to minimize the negative impact of oil prices on standard of living. All of this has no escaped the attention of the government which has been encouraging the private sector to take the lead in finding reliable technological solutions through regulations, grants, and other incentives. The private sector has responded to the call because it is aware of the huge economic profits that may result from a reliable alternative to oil.

References

Alden, William. Analyst: Rising Oil Prices ‘Primary Threat’ To U.S. Economy As Libyan Violence Mounts. 25 May 2011. 4 April 2012 <http://www.huffingtonpost.com/2011/03/21/libya-conflict-oil-prices_n_838624.html>.

Alden, William and Bianca Bosker. Oil Prices Squeeze Small Businesses As Transportation Costs Rise. 25 May 2011. 4 April 2012 <http://www.huffingtonpost.com/2011/03/01/oil-prices-small-business_n_828503.html>.

Bunkley, Nick. With Demand Slipping for Its Pickups and S.U.V.’s, G.M. Will Lay Off 3,550. 29 April 2008. 4 April 2012 <http://www.nytimes.com/2008/04/29/business/29auto.html>.

CNN. Saudi prince calls for lower oil prices. 29 May 2011. 4 April 2012 <http://articles.cnn.com/2011-05-29/world/us.saudi.prince.oil_1_oil-prices-saudi-arabia-saudi-people?_s=PM:WORLD>.

Green Living Tips. Fossil Fuel Fast Facts. 14 July 2009. 4 April 2012 <http://www.greenlivingtips.com/articles/333/1/Fossil-Fuel-Fast-Facts.html>.

Huffaker, Ray. “Impacts of Biofuels on Water Supply: Proposed Cures May Worsen the Disease.” Choices: The Magazine of Food, Farm & Resource Issues 2010: 48-51.

Hybrid Cars. Toyota Plans for Major Hybrid Growth in U.S. 7 December 2011. 4 April 2012 <http://hybridcars.com/news/toyota-plans-major-hybrid-growth-us-33528.html>.

Oster, Shai and Spencer Swartz. China Tops U.S. in Energy Use. 18 July 2010. 4 April 2012 <http://online.wsj.com/article/SB10001424052748703720504575376712353150310.html>.