CS Question #1: In what ways is the U.S. infrastructure dependent on foreign oil?

Aware of the strong dependence on oil, the U.S. government has preserved a supply of oil to use in an emergency. This supply is known as the Strategic Oil Reserve. The goal is to use this oil when a national energy crisis occurs. Most people agree that the oil reserve is too small to sustain the U.S. economy through a long crisis. However, the supply has been useful at times. In early 2000, President Clinton released a portion of the oil reserve to help curb the rising costs of home heating oil in the northeastern United States. Unfortunately, the oil reserve is not enough to protect the U.S. economy from a hike in OPEC oil prices. The oil reserve bolsters consumers' confidence that small emergencies can be met with the stored supply of oil.

Many nations are rich in the natural resource of oil. It can be difficult to understand why an increase in price could have such a strong effect on the United States. After all, if one nation increases the price of oil, why can't the United States purchase oil from a different nation at a lower cost? This simple solution becomes difficult because many of the world's oil exporting nations have organized a cartel, known as the Organization of Petroleum Exporting Countries, or OPEC. A cartel is an association of businesses that creates an international monopoly. Because they have formed a monopoly, OPEC members set production standards and prices. OPEC produces approximately one third of the world's oil supply. This gives the cartel enormous political and economic power. The United States imports nearly one half of its oil from OPEC member nations. In addition, U.S. domestic oil production has slowly declined since the early 1980s. Consider the three basic facts: The U.S. economy is dependent on oil. The United States does not produce much oil domestically. The United States relies heavily on OPEC for oil. Therefore, when OPEC increases oil prices, the U.S. economy is severely affected.

CS Question #3: What is OPEC?

If OPEC increased oil prices significantly, the U.S. economy could be slowed to the point of recession. Inflation would be the main reason for the recession. As the cost of consumer goods increased, more money would be circulating in the economy. However, that money would be worth less. Personal and corporate savings and investments would also suffer since inflation devalues invested money. The government might increase interest rates to slow the growth of the economy and halt inflation. During periods of inflation, consumer spending decreases and costs of production increase. Corporations would need to lay off workers and streamline production. The unemployment rate would probably increase. The Federal Reserve might decide to release more currency into the economy to match the rate of inflation. With more currency available, prices would continue to increase, but there would be available currency to compensate. Inflation can create a scarcity of currency, as banks become unable to honor deposits. Although increasing the amount of currency makes prices increase, the inflation sparked by scarce cash reserves can be crippling. No matter what actions the government takes, if oil prices remain high for too long, the recession can turn into a depression. If oil prices decline, the government can adjust its policies to allow the economy to recover. On most occasions, the rise and fall of oil prices are associated with foreign affairs policy and not with domestic economic policies.

CS Question #4: What are some actions the government can take to curb inflation?

Further Thought:

1. How does an increase in the money supply help curb inflation?
2. How does inflation devalue invested money?
3. Many people believe that the United States government should try to increase domestic production by drilling for oil in national parks and forests. Others believe the United States government should preserve that land for future generations. What do you think?