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Oil is a global commodity. This means that when prices rise in one part of the world, they usually rise everywhere. Right now, the conflict involving Iran has already pushed oil prices up significantly. Production in the Middle East has slowed because of efforts to close the Strait of Hormuz. This is a critical waterway for tankers moving oil from the Middle East to the rest of the world. Attacks on oil facilities, storage sites, and shipping routes have caused more disruptions. These problems have rippling effects across the global economy.
This war has also disrupted the flow of liquefied natural gas, or LNG, from Qatar. Qatar controls nearly 20% of the global market for this gas. This shortage affects the world economy and global supply chains. Shortages of natural gas impact the production of fertilizer and aluminum, as well as other essential materials. As a professor who has studied oil price shocks for twenty years, I am often asked about the effects of rising oil prices on the U.S. economy. The answer to that question has changed dramatically over the past two decades.
Countries that import most of their oil must pay foreign nations for those supplies. This was a major problem for the United States from the 1970s through the early 2000s. During that time, the U.S. sent billions of dollars annually to oil-producing countries in the Middle East, Africa, and Latin America. This money built up other countries' economies or became financial surpluses that fueled market excitement. These surpluses sometimes created asset bubbles that could suddenly collapse. Oil imports increased the U.S. trade deficit in the 1970s and beyond. As a result, U.S. industries suffered from high energy costs, which forced the closure of major steel plants and iron and copper mines. Falling purchases of cars and other durable goods also led to worker layoffs.
Now, however, the United States is a major producer and exporter of oil and refined petroleum products. Every day, on average, the U.S. exports over 6 million barrels of refined products and over 4 million barrels of crude oil. The U.S. still imports some crude oil, mostly heavy oil from Canada, which is processed at specific refineries on the U.S. Gulf Coast. When factoring in these imports, the net U.S. oil trade balance is a positive 2.8 million barrels per day. This stands in sharp contrast to the mid-2000s, when the balance was a deficit of 12 million barrels per day.
U.S. oil production comes from 32 states, though it is mainly driven by the largest producers: Texas, New Mexico, North Dakota, Alaska, Oklahoma, and Colorado. Because this revenue stays within American companies, the nation's gross domestic product is less vulnerable to oil price increases than in the past. Previously, high prices meant that more U.S. dollars were flowing overseas. Today, the money remains in the domestic economy. This fundamental shift means that when oil prices rise, the economic pain is not as severe for the average American or for the broader national budget.