Increasing U.S. oil production can jump-start the economy: AEI

Increasing domestic oil production could reduce unemployment, create jobs, and help jump-start the U.S. economic recovery, said Marc Weidenmier of the American Enterprise Institute (AEI), a conservative U.S. think tank.

Weidenmier thinks expanding domestic oil production has not only short-term economic benefits, but it can also protect the U.S. against future oil shocks.

Oil shocks, or sudden increases in oil prices, are usually negative for the U.S. economy because they increase the cost of doing business and eat away at the disposable income of car-driving Americans.

In fact, Weidenmier claims that since World War II, every U.S. recession except one has been preceded by a large increase in oil prices. The best example of a recession driven by an oil shock was the 1973-to-1975 period of stagflation, which was preceded by the 1973 oil crisis.

This oil crisis -- during which prices quadrupled -- occurred because several large oil exporters from the Middle East proclaimed an embargo in protest of U.S. support for Israel in the Yom Kippur War.

This episode illustrates the strategic importance of reducing oil dependence because the largest oil exporters in the world are Middle Eastern countries and Russia, and neither is too friendly with the U.S.

Some may tout alternative energy technologies as the solution to this problem, but they are currently not efficient or competitive with traditional sources of energy. While they develop and become viable within a few decades, domestic oil production can help bridge [the] transition to cleaner alternative sources of energy, said Weidenmier.

As for immediate economic benefits, Weidenmier's research shows that oil-producing U.S. states -- which he defines as Alaska, Louisiana, New Mexico, Oklahoma, Texas, and Wyoming -- do not suffer from the negative effects of oil shocks.

Or more precisely, the economic activities and jobs created by the oil sector -- which increases production in response to higher prices -- offset the negative impact of rising oil costs on the rest of the economy. In fact, in some cases, oil shocks actually boosts economic growth and lowers the unemployment rate in oil-producing states.

It logically follows that if the U.S. were to boost oil production in the absence of an oil crisis, the economy and the jobs market will receive an immediate boost.

If it is indeed true that alternative energy will supplant fossil fuel in just a few decades, it might make sense for the U.S. -- which is currently the third largest oil producer in the world and has the 13th largest proven oil reserves -- to ramp up production during that time.

If America embarks on this path, its production may drive down global oil prices. While this may be bad for U.S. oil producers -- who then may need subsidies from the government -- America as a whole country may actually benefit from this outcome.

Email Hao Li at hao.li@ibtimes.com