Cost is 0.75% of economy, or $87 billion.   U.S. production is down 11% to 4.93M barrels/day from 5.56M a year ago (03).  Imports are down 4%.  Cost of imports $300B/yr.  U.S. production 57% of our oil is imported. 1981 price in current dollar would be $79/barrel.  In 1981 the US spent 7.2% of GDP; this year projected 7.6%.    Foreign payments of $200 billion in 04

NEW YORK - During the past few years, conditions for economic growth in the U.S. could hardly have been better: Interest rates were low, the federal deficit was surging, and energy prices were also low. Each factor provided economic stimulus, and the economy posted solid gains

Now two of the three factors--interest rates and energy, specifically oil prices--are heading in the opposite direction. That does seem like a problem, though Federal Reserve Chairman Alan Greenspan is quelling concern.

Everyone knew the Federal Reserve would have to increase interest rates sooner or later. But the surge in oil prices seems to have come as a bolt out of the blue: No one predicted it. Even as oil prices rose from under $30 per barrel, where they were just one year ago, to $40, then $50, Wall Street analysts saw the rise as a spot phenomenon, nothing really to worry about.

But today crude is selling for $55 per barrel on the New York Mercantile Exchange. The price rise has just started to hit consumers in the form of higher gas prices. On Friday, Greenspan added his voice to the chorus, noting oil prices adjusted for inflation were still not as high as they were in the early 1980s and that, no, the world is not "running out of oil."

The chairman concluded: "So far this year, the rise in the value of imported oil--essentially a tax on U.S. residents--has amounted to about three-quarters of one percent of gross domestic product. The effects were far larger in the crises of the 1970s. But, obviously, the risk of more serious negative consequences would intensify if oil prices were to move materially higher."

Compared to "so far this year," however, the price of oil has already moved "materially higher." In the spring, oil was still trading for under $30 per barrel. The price has gone up by $6 or more than 12% in just the last three weeks. And no one saw it coming.

To be sure, there is nothing Greenspan can do about it. But even if the good doctor's diagnosis is correct--and there is reason to believe his chart of the symptoms is at least a few weeks old--is the rise in oil just a bump in the road?

First of all, three-quarters of one percent of GDP is actually quite a bit of money. U.S. GDP is now running at $11.7 trillion. Losing three-quarters of one percent of growth amounts to an $87 billion hit to the economy. Greenspan say this is "essentially a tax." If the president proposed raising taxes by $87 billion per year--which would mean a 4.5% increase in all federal taxes--that would be big news. In fact, in an election year, it would be unimaginable.

Unlike in the early 1980s, when most of the oil the U.S. consumed was still domestic, now 57% of the oil consumed in the U.S. is imported (see: "New Oil Crisis: 1979 In Spades").

Greenspan speaks of increasing production, but that's not happening in the U.S. either, at least not yet. A year ago, the U.S. was producing 5.56 million barrels of oil per day, according to the U.S. Energy Information Administration. Most recently, production was actually down by 11% to 4.93 million barrels. Greenspan and others are waiting for new technology, new oil discoveries or new conservation measures. All may arrive, but meanwhile, more U.S. cash will flow overseas.

The good news may be that imports were down, too, no doubt in response to price. But even with a 4% drop in imports by volume, the U.S. oil import bill, if oil prices stay at current levels, will likely exceed $300 billion per year. That's more than triple the 2002 bill. Of course, all calculations in this environment tend to get dated pretty quickly (see: "America's Quarter-Trillion-Dollar Oil Bill"). It's a big deal, or, to quote Chairman Greenspan, it's "not frivolous given the stark realities evident in many areas of the world."

Aside from overseas producers led by our steadfast ally Saudi Arabia, U.S.-based multinational oil companies continue to benefit from the trend. Shares in ExxonMobil (nyse: XOM - news - people - news - people ), BP (nyse: BP - news - people - news - people ), Chevron (nyse: CVX - news - people - news - people ) and ConocoPhillips (nyse: COP - news - people ) are all up by 25% to 50% compared to a year ago. Oil service companies like Schlumberger (nyse: SLB - news - people ) and Halliburton (nyse: HAL - news - people ) tell a similar story. The four biggest oil companies have seen their total market value rise by more than $200 billion in one year. If OPEC had a reported market value, it would be up even more.

Not frivolous, as Greenspan might say

Top Of The News
America's Quarter-Trillion-Dollar Oil Bill
Dan Ackman, 09.27.04, 10:15 AM ET  (only part of article)

During the first eight months of this year, the price of oil has risen from just under $29. If prices stay at current levels--or even if they fall back a bit--the average price for the year will be around $39 per barrel. Last year, the U.S. consumed about 6.2 billion barrels, up 4.2% from a year earlier. At the same time, imports rose by 6.5%.

If the price of oil stays a bit above $48 for the rest of the year, and usage continues to rise, the quarter-trillion oil bill will be a reality. Just over $170 billion of that total will flow overseas.  (This proved optimistic for 04). 

The total U.S. energy bill is still much less than it was in real terms in 1981 when the price in 2004 dollars was over $79 per barrel. At that time, the U.S. was spending 13% of gross domestic product on energy, according to the U.S. Energy Information Administration. By 2000, despite a surge in oil prices that year, the U.S. was paying just 7.2% of GDP for its energy. The EIA doesn't report figures for the years following 2000. But with oil prices at current levels, energy costs could reach 7.5% of GDP, the highest level since 1992.

One result of the price increase has been that oil stocks like ExxonMobil (nyse: XOM - news - people ), BP (nyse: BP - news - people ), Chevron (nyse: CVX - news - people ), Halliburton (nyse: HAL - news - people ) and Schlumberger (nyse: SLB - news - people ) are all up by at least 25% since a year ago.

All told, Americans will likely spend about $75 billion or 43% more for oil this year than last year and 76% more than in 2002. To put that increase in perspective, $75 billion is equal to the amount Microsoft (nasdaq: MSFT - news - people ) will pay out to shareholders over the next four years, is larger than the budget of any U.S. government department, is about the budget for the state of California and was roughly the same as the Bush Administration's appropriation request for the Iraq war in 2003.

10/17/4

Project Kuwait plans to raise production [years off & if approved by its parliament] to 900,000 bpd from the current 450,000 bpd from the northern fields. Kuwait has a tenth of global oil reserves and produces at around 2.3 million barrels per day.  XOM, CVX, BP to bid on it. 

Alan Greenspan

Chairman of the Board of Governors of the Federal Reserve System
Economic Newsmaker

Education:
B.S. in economics, New York University (1948)
M.A. in economics, New York University (1950)
Ph.D. in economics, New York University (1977)

Date of Birth: March 6, 1926

Chairman and President of Townsend-Greenspan & Co.(1954-1974, 1977-1987); Chairman of the National Commission on Social Security Reform (1981-1983); nominated to the Board of Governors of the Federal Reserve System to fill an unexpired term (1987); reappointed to a full 14-year term (1992); named chairman of the Board for a fourth four-year term (June 2000).