Economic Report of the President

sequences of such an interruption on employment, wages, and pricesclearly would be massive. Moreover, the threat of disruption, small orlarge, hangs like a cloud over the economy and thus affects consumerand investor expectations. It is therefore imperative that the Nationhave policies to reduce its vulnerability to oil supply disruptions andto deal effectively with the consequences of any vulnerability that remains.One simple and often-used measure of vulnerability is the level ofthe Nation's dependence on imported oil. In 1977 the United Statesimported a record average of 8.8 million barrels of crude oil and petroleumproducts per day. By late 1980, however, imports had fallento about 6.5 million barrels per day. Although some of this drop wasdue to the recession and high inventory levels, a larger part of thedecline can only be accounted for by conservation and additional domesticproduction.Dependence on imported oil, however, is not equivalent to vulnerability.If imported oil came from many small geographically dispersedproducers, each unlikely to cease production suddenly, even ahigh level of oil imports would mean little vulnerability to interruption.At the other extreme, even a zero level of oil imports would nottotally protect the U.S. economy in the event of extreme instability inthe world oil market. The United States could not stand by andwatch the rest of the world's economies collapse without suffering irreparableeconomic harm itself, and would not do so, even if it werepossible to isolate itself from such damage.Thus, vulnerability is not easily measured. It is related in part tothe ability of the Nation's capital stock to adjust rapidly enough tochanges in the world price of oil, and in part to the fact that an oilsupply interruption would result in large domestic and internationaltransfers of wealth, large losses in output, losses of consumer and investorconfidence, and a sharp surge in inflation.The experience of past episodes of supply disruption has taughtpolicymakers to appreciate the limited ability of governments to allocatescarce petroleum supplies and the long-run problems that resultfrom attempts to shield consumers from the consequences of higherprices. These same episodes have also shown that such disruptionsare accompanied by other impacts that private markets cannot be expectedto take into account. For example, private economic decisionmakers—consumersand business firms—are unlikely or unable tofactor the substantial macroeconomic effects of an oil supply disruptioninto their individual responses. Therefore, they will tend to takefewer preventive measures than is socially desirable. Moreover, theexpectation of government intervention is also likely to affect privatebehavior. The experience of past disruptions may have created the92