Goldmark: Global oil market should push us to look deeper at home

Gas prices displayed at the Gulf Gas station

Gas prices displayed at the Gulf Gas station on the Smithtown Bypass in Nesconset. (Oct. 24, 2012) (Credit: Heather Walsh)

Peter Goldmark

Peter Goldmark, former publisher of the International Herald Peter Goldmark

Peter Goldmark writes a weekly column for Newsday. He is

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There are some ugly realities in the global oil situation that threaten a recovery for the American economy. They're not reported in the mainstream media and you didn't hear a word about them in the presidential debates. But they affect your pocketbook and mine, as well as our prospects for economic growth.

There have been 11 recessions since World War II. Ten of them were preceded by a spike in oil prices. The price of oil and gasoline has a direct effect on our economy. When families are forced to spend more on transportation, they cut their budgets somewhere else, because they have to keep driving to work and on the job.

Here's the dangerous part of that equation: According to an analysis by James Hamilton of the University of California, San Diego, an oil price spike that represents a 1 percent hit on the family budget usually translates in the six months that follow to a 6 percent reduction in purchases of durable goods -- items like appliances and automobiles. Families feeling the squeeze hold back on big-ticket items.

So a modest gas-price increase ripples in magnified form through the economy: Consumers buy less and businesses cut back and start laying people off. And gas price increases over the past five years have not been "modest."

The new pressure driving increases in the price of oil this decade is a killer combination of rapidly growing demand for oil by the new emerging economies like India and China, and the growing cost and difficulties of getting more oil out of the ground. By 2015, India and China are headed to consume three times as much oil as they consumed in 2005.

And while we hear about more oil being extracted in North Dakota and elsewhere, former Shell Oil Co. president John Hofmeister reminds us that we don't hear about production problems such as heavy salt concentrations in some new oil finds, difficulties drilling in the Arctic, and rapid exhaustion rates of many "tight," or shale, oil fields, whose productivity can decline at rates much higher than the 5 to 6 percent per-year decline in old conventional oil fields.

What this adds up to is that extraction of new oil costs more, and is expanding more slowly, than the skyrocketing consumption of oil in the emerging economies. The Chinese are dealing with this in typically direct and brutal fashion: They have simply muscled their way to the head of the line with oil producers in Africa and Latin America and made direct deals to pay cash for oil before it ever gets to the markets where others can bid on it.

And then there's Iran -- the wild card in the present situation. The West is applying tough economic sanctions against Iran because of its development of nuclear weapons. So Iran is producing less oil, which means less Iranian oil is finding its way into global markets -- which increases the squeeze on global supply and drives prices up. If Iran were to succeed in closing the Straits of Hormuz, either as part of a war in which Israel attacked its nuclear research facilities or as retaliation against the West for the sanctions, that would produce a sharp drop in world oil availability far larger than any of the interruptions produced by such events as the Iran-Iraq War, the first Gulf War, or the Egypt-Israel war in 1973 plus the oil embargo -- all of which were followed by recessions in the United States. So sanctions may be tough on us as well as on Iran.

There is an answer, and that is to start producing cleaner, cheaper alternatives to oil here at home, and to invest in the production and distribution systems to support that. (Disclosure: I serve as an adviser to the nonpartisan, nonprofit Fuel Freedom Foundation, which is proposing exactly this.)

That path can generate investment, protect family budgets, and allow us to stop shipping hundreds of billions of dollars overseas to countries that don't like what we stand for.

Peter Goldmark, a former budget director of New York State and former publisher of the International Herald Tribune, headed the climate program at the Environmental Defense Fund.