The True Cost of High Oil

Economists are furiously downsizing their economic growth forecasts for 2011 in the wake of the oil price spike, both for the US and for the world at large. Since last week, West Texas crude prices have soared $12 from $86 to $98. Each $1 increase in the price of oil jumps gasoline prices by 2.5 cents. Each one cent rise in the cost of gasoline takes $1 billion out of the pockets of consumers.

According to the U.S. government, more than half of the oil that we use is imported. So every month we send the rest of the world billions and billions of our dollars and they send us massive amounts of oil. We rapidly consume all of the oil they send us and we continually need more. So we keep sending larger and larger amounts of money overseas and they keep sending us larger amounts of oil. In the process, our national wealth is being drained at an astounding rate. It is one of the greatest transfers of wealth the world has ever seen.

When the price of oil rises substantially, the transfer of wealth accelerates. This is a very bad thing for the U.S. economy. For example, when oil prices were above $100 a barrel back in 2008 our trade deficit for the year was almost 700 billion dollars.