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in which the United States did not depend substantially on imported
oil. If the United States was vulnerable to price spikes before it became
a major oil importer, it might remain vulnerable even if it slashes its
imports today.
Basic economic theory does a good job of explaining why. Rapid
rises in consumer costs act like a sudden tax. People have less money
to spend, so they curtail all sorts of purchases. h e benei ciaries of their
bigger gasoline bills—oil exporters in places such as Saudi Arabia or
Kuwait—don't spend much of their windfall in the United States. h e
net result is that U.S. i rms can no longer sell as much of what they pro-
duce as before, forcing them to shrink production or fail; collectively,
the economy pulls back, at best slowing down, at worst reversing.
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h ere are other ways that price spikes af ect the economy—in particu-
lar, as we'll see later, they can slam the auto industry—but when it
comes to looking at the value of increased domestic oil production, it's
the impact on consumers' wallets that mat ers most.
So what changes if the money those consumers lose goes to an oil
producer in Texas instead of to a sheik in Iraq? Less than you might
hope. h e average American oil user isn't particularly rich, and she does
not save a lot of money. Instead, she spends what she has: if you put a
dollar in her pocket, she'll spend a dollar more. Rising oil prices, though,
create a windfall that l ows disproportionately to corporate treasuries.
h ey normally either spend it slowly (it takes time to develop plans for
large capital outlays) or distribute it to typically wealthier sharehold-
ers (through stock buybacks and dividends) and to executives (through
bonuses), who are less likely to quickly spend the extra dollars in their
pockets; they already have substantially more money and are more
inclined to save the extra cash.
Pinning down exact numbers for this dynamic is thornier than you
might imagine; the question of how individual and corporate spending
dif er in their economic impacts is far from being set led. (Its relevance
is not just to this topic; it's at the heart of i ghts over things like tax pol-
icy and government stimulus spending.) Reasonable estimates, though,
claim that the short-term consequence of taking a dollar from the aver-
age individual and giving it to the typical company—basically what
happens when oil prices spike over days or months—can be similar to
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