What are the economic costs of oil dependence?
As Professor Morris Adelman of MIT has tersely and precisely stated: “The real problem we face over oil dates from after 1970: a strong but clumsy monopoly of mostly Middle Eastern exporters cooperating as OPEC.” Over three decades ago two events permanently transformed the world oil market. In 1970, crude oil production from the U.S., until then the world’s largest producer, peaked at a level never exceeded since. Late in 1973, the Arab members of the Organization of Petroleum Exporting Countries embargoed oil exports to the United States and other countries supporting Israel in the 1973 October War. World oil prices tripled, dramatically demonstrating the market power of the new cartel (Figure 1). The market failure at the heart of the oil dependence problem is the market power of the OPEC cartel. The U.S. economy suffers three kinds of economic costs as a result of its oil dependence and the actions of the OPEC cartel (and other oil producers who may cooperate with them): • transfer
