A Trillion-Dollar Landmine

Back in 1968, Prudhoe Bay, the largest oilfield in the United States, was discovered in northern Alaska. It contained some 13 billion barrels of recoverable oil, and at its peak, it churned out 1.5 million barrels of black goo per day, adding a tidy amount to America's domestic oil production. What a treat that's been.

The problem is that bonanzas like Prudhoe Bay amount to a fraction of the oil we use. The U.S. imports the lion's share of its oil from foreign producers. That isn't breaking news to most people, but it typically gets passed off as a "thank-goodness-someone's-got-our-back" issue. However, check out the mushrooming tab that's being shipped off to our foreign-oil pals:

Year

Barrels Imported

Imported Oil Tab

2002

4.21 billion

$103 billion

2003

4.47 billion

$132 billion

2004

4.81 billion

$179 billion

2005

5.01 billion

$206 billion

2006

5.00 billion

$300 billion

2007

4.91 billion

$327 billion

2008 (estimate)

4.88 billion

$440 billion

The most recent 2008 estimate -- $440 billion -- assumes $90-a-barrel oil. With the current price hovering close to $140 a barrel, the figure becomes more like $683 billion. And if the price of crude were to hit $250 a barrel, as predicted by Russian oil giant Gazprom (OTC BB: OGZPY.PK), the figure balloons to well over a trillion dollars, but who's counting?

Well, Fools, in an economy with a GDP of around $14 trillion, sending anything close to $1 trillion to foreign countries isn't anything to sneeze at.

Here are three reasons why our dependence on foreign oil will be more than just a nagging issue for some time to come.

The neverending story
One problem with trade deficits fueled by oil imports is that they feed on themselves: the bigger the deficit, the weaker the dollar gets, and the weaker the dollar gets, the bigger the deficit can become. How so, you say? Shouldn't the weaker dollar push imports to decline? For many products, yes, but oil is different. There are few alternatives to oil, and consumption can't be reduced in short order. When oil goes up, our trade deficit goes up, and the dollar goes down. When the value of the dollar falls, companies that rely on cheap imports, like Wal-Mart (NYSE: WMT  ) and Dollar Tree (Nasdaq: DLTR  ) , can really feel the heat as costs begin to soar.

What goes around, comes around Oil-exporting countries have to do something with all those dollars they accumulate. Where do a lot of them end up? As investments in U.S. securities. Of course, that helps in many ways, propping up markets that might be in even deeper water without foreign investors providing much-needed liquidity. For example, Citigroup (NYSE: C  ) grabbed a $7.5 billion lifeline from the Abu Dhabi Investment Authority last year. According to the Treasury Department, oil-exporting countries held $153 billion in U.S treasuries as of April, up 37.4% from the year before.

The problem arises when the benefits of those securities -- interest payments on debt, and dividends from stocks -- get siphoned out of the U.S. economy. I'm all for globalization, but when an ever-growing slice of our economic pie gets served up outside our borders, the benefits of our own labor become more and more distant.

Geopolitical woes
Whether it's a cause or an effect -- or even related at all -- some of the world's great oil reserves aren't located in the most politically sound regions. Some of the top oil-exporting countries -- Saudi Arabia, Nigeria, Venezuela, Iraq, Colombia, Russia, and Libya -- might not read like a "who's who" list of American buddies. Unfortunately, our economy relies on those countries more and more as oil prices soar. Case in point: ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and Chevron (NYSE: CVX  ) , just to name a few, learned the hard way about operating in oil-rich foreign lands when Venezuelan President Hugo Chavez tightened his nationalization grip, forcing a handful of American companies to take a hike. His gain, our loss.

Where do we go from here? Like most things that look unbelievable, a trillion-dollar imported-oil tab might be economic fearmongering at its best. And if the price does happen to get that high, it's unlikely to stay there very long. But that's not the point.

Instead, realize this: The burden of oil contains more landmines than just higher prices at the pump. Gas-tax holidays, windfall profit taxes, and OPEC production increases may or may not alleviate gas prices, but they’re almost guaranteed to do precisely nothing to wean the economy off foreign oil.

Let the games continue.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Wal-Mart is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.


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  • Report this Comment On June 26, 2008, at 6:37 PM, madmilker wrote:

    what is it with the people typing about "cheap" imports. The dang China currency has gone up over 20% since the first of the year.....which means....dipstick! all those so call "cheap" items have gone up too! Dang .....just the cost to ship a "container" has gone from $4000 to $8000 and it still cost over $9 billion a year to clean up the misplaced fish from the ballast tanks of ships!.....and to all the feeble minded nincompoops tat are call "fools" on this site...Quote***quote*****In China, as elsewhere, we follow the Wal-Mart tradition of building our business one store and one customer at a time. We strive to provide our customers with friendly service and a wide selection of quality products at Every Day Low Prices. With each Wal-Mart store we bring advanced retail know-how to the local market. By fostering a healthy, competitive environment, we hope to constantly improve our business operations and customer service in order to contribute to the prosperity of the local economy.

    Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. At Wal-Mart, we always work with our suppliers to grow together. In August 2007, Wal-Mart once again secured the top spot of the 2007 Supplier Satisfaction Survey conducted by Business Information of Shanghai. Additionally, Wal-Mart directly exports about US$9 billion from China every year. The export volume by third party suppliers is also estimated to be over US$9 billion.....*******end of quote!

    Now! if there be 182 country's making items for the world to buy and they have only 5% of the pie in China...duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there.... but with the "yuan" going up in value and the US dollar going down...all the foreign items that the American consumer buys thinking it is cheap has went up in price. People...its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the "we the people" have to turn to the "second" largest employer in America(Uncle Sam) to sell "we the people" debt in order to get all them dollars back! 50 years ago a foreigner would had given their left nut for a US dollar or a Hershey's chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wakeup! America and think "MADE IN AMERICA" and put the word Washington back in D. C.....Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution.....Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution. In his Farewell Address of Sept. 17, 1796, he drew on the results of his varied experience, offering a guide for both present and future. He urged his compatriots to cherish the Union, support the public credit, be alert to the "insidious wiles of foreign influence," respect the Constitution and the nation's laws, abide by the results of elections, and eschew political parties of a sectional cast. Asserting that the United States and Europe had different interests, he declared that it "is our true policy to steer clear of permanent alliances with any portion of the foreign world," trusting to temporary alliances for emergencies. He also warned against indulging in either habitual favoritism or habitual hostility toward particular nations, lest such attitudes should provoke or involve the country in needless wars.

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