Oil Supply, Demand, and the U.S. Economy Explained

Introduction: Oil and the U.S. Economy

Few forces have a greater or more direct impact on the U.S. economy than the global oil trade. The industrial expansion of the American way of life has been largely dependent on an ever-greater consumption of gasoline, the vast majority of which must be imported from other nations. The result is a tumultuous history of oil trade — in terms of both economics and the political and military conflicts that often accompany it. For the United States, the increasingly delicate balance of oil supply and demand has had, and will continue to have, a profound impact on economic affairs. As recent headlines demonstrate, there is a close correlation between dimensions of the U.S. economy such as its economic stimulus program and the supply and demand of oil on the global market.

Federal Reserve Policy and Oil Price Fluctuations

The article by Gorondi and Sampson (2013) underscores this correlation, reporting that a recent announcement by the Federal Reserve had an immediate impact on global oil prices. Because oil prices fluctuate widely according to shifting levels of supply and demand, specific policy decisions can be felt at the consumer level through the cost of filling up at the pump, heating a house, or running a business. According to Gorondi and Sampson, "the Fed was widely expected to begin winding down its program of buying $85 billion a month in bonds and other assets. Instead, the central bank said it will maintain the pace of the bond purchases because it thinks the economy still needs the support" (p. 1).

This economic stimulus strategy has had the effect of infusing the U.S. economy with a greater supply of liquid capital. This, in turn, has encouraged a return to steady growth among private enterprises. As has been the pattern of the U.S. economy, greater productivity requires greater quantities of petroleum. Consequently, as Gorondi and Sampson report, the supply of oil declined over the preceding month, leading to higher prices per barrel and, by extension, higher everyday expenses for American consumers.

An article by Sampson et al. (2013) further elaborates on the direct link between economic demand for oil, the reduced supply of the commodity, and the resulting price spike. According to Sampson et al., these factors contributed to the anticipation of higher oil prices in the approaching month of October. The article reports that "oil was showing a slight gain in the morning but rose further after the government said that supplies of oil and gasoline each fell by 1.8 million barrels in the week ended Aug. 30. The drop in gasoline supplies was greater than expected, and refinery usage increased, both signs perhaps of solid demand for fuel at the end of the summer driving season" (Sampson et al., p. 1).

Supply Decline, Peak Oil, and Long-Term Risks

What is taking place today is part of an inextricable cycle upon which the robustness of the American economy has been at least partly dependent since the rise of the U.S. automobile industry and the construction of the interstate highway system. American dependency on oil — specifically from foreign sources — has increasingly come to shape the nation's economic fortunes, with some economists issuing sobering warnings about the not-too-distant future. The matter of supply and demand, some argue, will reach a critical point in the coming years as the supply of this finite fossil fuel continues to dwindle.

The article by Ahmed (2013) describes the phenomenon known as "peak oil production," which indicates that the global community has reached — and will surpass — its peak capacity to produce oil cheaply and efficiently. The result will be global shortages in supply and sharp price spikes, with potentially severe consequences for the world economy. According to Ahmed, "global production of crude oil and condensates has essentially remained on a plateau of about 75 million barrels per day (mb/d) since 2005 in spite of a large increase in the price of oil. Even more important, the global net oil exports from oil-exporting countries (oil production minus internal consumption) have peaked and are in decline" (p. 1).

Conclusion: The Need to Reduce Oil Dependency

Naturally, this drop proved only temporary. In the time that followed, oil recovered much of that ground, trading at $103.13 per barrel at the time of writing. This fluctuation should be understood as a telling indicator of America's dependency as a nation, an economy, and a way of life. The persistence of consumption at current rates — whether in the context of driving, heating a home, running a business, or engaging in recreational activity — is not economically sustainable. The increasingly fragile balance between the supply and demand of oil cannot be maintained indefinitely. As an inherently finite resource, oil is the quintessential example of a commodity for which supply is decidedly limited. It is therefore incumbent upon the United States to find meaningful ways of limiting its growing demand.

Works Cited

Ahmed, N. (2013). Peak Oil Lives, But Will Kill the Economy. The Guardian.

Gorondi, P. & Sampson, P. (2013). Oil rises sharply as Fed maintains stimulus program, U.S. oil supplies drop more than expected. The Washington Post.

Sampson, P. et al. (2013). Oil Rises on U.S. Supply, Economic Data. Rigzone.

Stonebraker, R.J. (2013). Demand and Supply Applied: Oil Prices. The Joy of Economics.