Greg Ip

 If I had to pick the economy’s likeliest spoiler this year, it would be oil prices. Whether it’s Iran trying to close the strait of Hormuz or the Arab Spring  wafting through Saudi Arabia, I have no idea; but nothing matches the track record of oil in delivering nasty economic surprises.But over the long run, something important is happening to the role of imported oil in the American economy: it’s shrinking. This comes through quite strikingly in the outlookreleased today by America’s  Energy Information Administration. The remarkable expansion of U.S. production from shale gas and unconventional oil sources such as the Bakken formation in North Dakota are relatively well known. There is, however, less awareness that American consumption is barely growing (see the nearby chart). The EIA has sharply revised down how much liquid fuel it reckons America will consume in 2035, to 20m barrels a day, from 22m it projected last year, which would be below the 2005 peak. Couple that with rising domestic production, and America will rely on net imports for just 36% of its liquid fuel needs in 2035, compared to 60% in 2005.

Several factors are at play. Factor one (unfortunately) is lower economic activity in the aftermath of the recession. Factor two is upward pressure on the price of oil from emerging markets demand. The EIA reckons by 2035 it will average $145/barrel in 2010 dollars, up from last year’s range of $85 to $110. The higher price stimulates domestic production, encourages conservation and makes alternatives more viable. Factor three is policy such as more demanding fuel economy standards for vehicles and energy efficiency requirements for appliances, and state portfolio standards that mandate the use of more renewables in electricity generation.

These developments have several  positive implications. The first is lower CO2 emissions. As the nearby chart shows, the EIA reckons America’s energy-related emissions will be lower in 2035 than in 2005.   Among the more notable trends identified by the EIA is the electric industry’s falling reliance on coal. Increased competition from natural gas and renewables and stiffer environmental requirements mean coal-fired plant retirements will exceed new additions, leading to a steady decline in coal-fired generating capacity.

The other key implication is that the economy will be less sensitive to changes in the oil price. That will be both because America will use less oil and gas per unit of GDP, and because more of the oil and gas it consumes will be domestically produced. So a rise in the price will transfer income from domestic consumers to domestic rather than foreign producers.

This isn’t going to happen fast enough to save the economy if oil prices spike this year. And even in the future oil will still be able to do a lot of damage: America will remain a big net importer for as far as the eye can see. The inelastic nature of demand means it is very difficult for consumers to respond to higher oil prices in the short run by consuming less.

But the trend lines are encouraging.

The original post is linked here.