Why it’s important for the US to reduce imported oil dependency

Market Realist

Must-know: The fuel economy and its impact on the US oil industry (Part 6 of 6)

(Continued from Part 5)

Less dependency on oil

One of the major reasons driving fuel economy standards is less dependency on petroleum imported from other countries. According to the U.S. Department of Energy (or DOE), nearly 40% of the oil consumed in the U.S. is imported, costing ~$300 billion annually. Additionally, according to the U.S. Energy Security Council, oil imports constitute half of the U.S. trade deficit.

Better fuel economy will cut down this dependency to an extent, and help the U.S. reduce the impact of oil price shocks and cartel market control—mostly by Organization of Petroleum Exporting Countries (or OPEC).

Oil price shocks may have serious economic consequences on the U.S. as significant amounts of U.S. wealth is transferred to oil exporters. This holds true in the light of the recent crisis and disruptions of oil supply in the Middle East. It demonstrates the importance of relying less on foreign oil.

However, with measures such as fuel economy standards the U.S. doesn’t need to depend on oil imports as much as it used to. The U.S. Energy Information Administration (or EIA) estimates that the new standards for light vehicles will increase fuel economy by more than 50% by 2040. It’s important to note that companies like Ford Motors (F), General Motors (GM), Honda Motors (HMC), and Tata Motors (or TTM) need to comply with the fuel economy standards set by the Department of Transportation (or DOT). Most of these companies are a part of the SPDR S&P 500 ETF Trust (SPY) and the Vanguard Total International Stock ETF (VXUS).

The DOE estimates that these standards will reduce U.S. petroleum demand by 2.2 million barrels per day—about 12 % of current demand—in 2025, save $8,200 on average in fuel costs over the life of a new vehicle purchased in 2025, and reduce greenhouse gas (or GHG) emissions by six billion metric tons.

The U.S. oil industry has witnessed many changes over the years. One of the recent ones being loosening of the export ban on U.S. crude. For more on this, read our Market Realist series, Must-know: US oil industry reaction to the loosening export ban.

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