Nearly 40 years ago to the day, oil producers in the Middle East retaliated against America's support for Israel during the Yom Kippur War by cutting their output by five percent. The result? Oil prices quadrupled and dented the U.S. economy.
In the decades since, the United States has been trying to insulate itself from similar shocks. The U.S. military dramatically expanded its presence in the Middle East to keep the crude flowing. The nation created a Strategic Petroleum Reserve to be tapped during shortages. And Congress enacted stricter fuel-economy standards to reduce the amount of oil we use.
How much did these measures help? My colleague Steven Mufson took an in-depth look at this topic and concluded that the United States has done a lot to "defuse the power" of an OPEC embargo. But there are still plenty of vulnerabilities.
Today, the United States still imports about one-third of its oil from abroad — roughly the same fraction as it did in the 1970s. Even with the recent boom in domestic production, oil prices are higher, in real terms, than they were 40 years ago, thanks to surging demand from countries like China and India. And if prices spike — driven by, say, unrest in the Middle East — then recessions can quickly follow.
America's oil vulnerabilities
Just how exposed is the United States to a modern-day oil shock? A new paper from the Council on Foreign Relations tries to assess the situation. If the price of crude rose 25 percent, U.S. unemployment would rise by about 0.5 percent, the authors estimate, as the shock rippled through the economy.
But the impact wouldn't be evenly distributed. Most oil-consuming states would lose a lot of jobs (red), but a few oil-producing states, like Texas and North Dakota, would actually gain jobs (green):
One reason why states like North Dakota and Texas would do so well in a price spike is that they've seen a boom in oil production in recent years, thanks to new technology that has boosted production from shale deposits and other sources.
But the flip side is also true: These states would be disproportionately hurt if the price of oil dropped suddenly. That's happened before: Texas suffered a severe two-year recession after oil prices collapsed back in 1986. And, while the Lone Star State has taken plenty of steps to diversify its economy since then, the shale boom has pushed it back toward oil.
"Texas is actually becoming more dependent on oil and natural gas in recent years," says Stephen Brown, an economist at the University of Las Vegas, Nevada and a co-author of the report.
Stacking up globally
How do America's vulnerabilities compare globally? For that we can turn to the "Oil Security Index," a new project from Securing America's Future Energy (SAFE) and Roubini Global Economics. The United States, they find, is still more exposed than most other advanced economies to disruptions in the global oil supply:
This is a more sophisticated index that looks at a variety of variables: How much oil does a country use to generate a unit of economic activity? How much gasoline do its drivers consume? How much oil do the countries import and export? What sort of emergency stockpiles do they have? How vulnerable are their supply lines?
The report suggests that countries such as Japan, Germany and Great Britain are best insulated from oil shocks because of their stringent fuel-economy policies. The United States is in the middle of the pack, but it has become markedly less vulnerable to shocks since 2000, and is now less exposed than, say, Australia or South Africa.
At the same time, China and India are becoming increasingly reliant on steady supplies of oil, while Russia and Saudi Arabia are quite vulnerable to steep drops in price — not least because both countries require oil revenue to fund their budgets. You can see the full report here.