America's Oil Weapon: The Automobile

Increased domestic production of fuel-efficient vehicles, combined with decreased travel, cushions impact of oil prices.

July 01, 2014

NEW YORK – Higher oil prices threaten the U.S. economy, but not like they used to, according to an article in the Wall Street Journal. North Dakota is a reason for that. Changes in America's car industry and driving habits are bigger reasons.

Amid sectarian violence in Iraq, oil prices have risen, and it isn't hard to imagine them going higher. That is unwelcome for a U.S. economy still struggling to find its footing. Starting with the downturn set off by 1973's oil shock, higher energy prices have been a constant factor in U.S. recessions.

But the economy isn't what it was in 1973, or even in 2007, when rising gasoline prices added to strains on U.S. household spending power.

One difference is the shale boom. The U.S. now produces more than eight million barrels of oil a day, up from five million in 2007. So when Americans pay more at the pump, more of what they pay ends up back in the pockets of other Americans. A shift in U.S. energy consumption toward abundant natural gas provides an additional offset.

But one of the biggest ways high energy prices affect the economy is through consumers' car-buying behavior. When gasoline prices rise sharply, overall vehicle sales go down. And because of the major role the automobile industry plays in American employment, those sales declines can pack a lot of oomph.

What has historically intensified this effect is that U.S. car companies' vehicle offerings have tended to have lower fuel economy than those of foreign counterparts.  But with more efficient offerings than in the past, U.S. car makers may capture more of the consumer shift toward higher-fuel-economy vehicles if gasoline rises further. The Wall Street Journal cites a report from the University of Michigan Transportation Research Institute, finding that the average vehicle sold in May experienced 25.6 miles per gallon, versus 20.1 mpg when the recession began. In a report last week, consultant Wood Mackenzie forecast that U.S. road-fuel demand would drop 10% by 2030 despite vehicle numbers rising by 17%.

Moreover, foreign auto makers have expanded their American manufacturing presence, so more of any sales increase they see as a result of higher gasoline prices will end up in U.S. workers' paychecks.

Meanwhile, despite a 5% increase in the U.S. population, Federal Highway Administration data show that the distance traveled on highways in the year ended April was 2% lower than in the 12 months before the recession. Combine changing driving patterns with efficiency gains, and the American consumer is gaining a useful umbrella against global oil's storms.

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