In the first of a two-part series, Paul Tansey, Economics Editor, examines the US economy's vulnerability in the face of rising oil prices.

The unending phalanx of cars snaking around Boston on Route 128, headlights piercing the late afternoon dusk, illustrates simultaneously the strengths and weaknesses of the US.

For despite the frantic pace of growth in China and India's economic take-off, the US remains the largest, richest economy in the world. For Americans, the car is the ultimate symbol of their wealth.

"Hardly anyone sees my house, but everybody sees my SUV", a friend confided, as he manhandled an immense Chrysler Suburban into a mall parking lot near Boston.

The US population exceeded 300 million for the first time during the past year, and there are almost as many cars as people. The US department of transportation counted 243 million registered passenger vehicles in the US in 2004, including SUVs and pick-up trucks. Thus, for every 100 US residents of all ages, there are more than 80 private cars.

And they are needed. In a country where public transportation outside the major cities is extremely poor and where walking the highway is tantamount to vagrancy, the car is king of the road. Nine out of every ten Americans drive to work. In the US, the car is not only a status symbol, but an economic necessity. But the US is paying dearly for its love affair with the car. A gallon of petrol is now costing an average of $3.11 (€2.12) at the pumps, having increased by 88 cents a gallon over the past year. The rising price of gas is a perennial topic of conversation; it occasions much more excited comment than the subprime crisis and the drooping dollar put together.

Moreover, increasing petrol prices are depressing consumer spending in other spheres. In its October World Economic Outlook, the International Monetary Fund (IMF) noted that in the US during the third quarter that "private consumption growth slowed markedly in the face of rising gasoline prices".

The US is a voracious consumer of energy. Representing just 5 per cent of the world's population, the US accounts for one-quarter of global energy consumption. Since domestic energy consumption far exceeds domestic production, the US is becoming increasingly dependent on energy imports, and particularly on imports of oil.

Petroleum now supplies two-fifths of all US energy needs and transportation accounts for 28 per cent of all US energy use. The US is currently consuming 20.8 million barrels of petroleum every day. According to the US department of energy, US dependence on net petroleum imports is 59.8 per cent. In other words, three out of every five barrels of oil consumed in the US each day must be imported.

"Every single hour, we spend $41 million on foreign oil", presidential hopeful Barack Obama pointed out recently. Oil imports cost the US $500 billion in 2006, equivalent to $1.4 billion a day.

Oil is now America's Achilles' heel. While the subprime crisis will eventually subside, the vulnerability of the US on the energy front will remain. As a large, dynamic and relatively closed economy, the US can source most of its needs within its own borders. Oil is the exception and this gives rise to two long-term problems.

In the first place, rising oil prices act as a brake on the pace of US economic growth while adding to the US import bill in the short run. Rising oil prices, along with the slowdown in residential construction and the fallout from the subprime crisis, have caused the IMF to revise downwards its forecast growth rate for the US economy from 2.8 per cent to 1.9 per cent in 2008.

The IMF also projects that the US will continue to run a large balance of payments deficit next year, equivalent to 5.5 per cent of US national income.

Along with the fallout from the subprime crisis, both slowing growth and a continuing large US payments deficit are exerting downward pressure on the dollar's value on foreign exchanges. As oil prices have climbed within touching distance of $100 a barrel, the dollar has dipped to almost $1.47 against the euro.

So far, so bad, but it gets worse. Because international oil prices are denominated in dollars, the declining international value of the greenback is cutting into the purchasing power of oil producers. As a result, producers appear content to allow oil prices to continue rising in dollar terms in order to compensate for its diminished international purchasing power. Thus, in a perverse way, the fall in the dollar's external value is actively contributing to rising oil prices.

Nor is this the end of the story. Countries that run persistent balance of payments deficits on current account must borrow from the rest of the world to cover their deficits. The large and sustained US payments deficits of recent years have only been possible because countries generating large payments surpluses have been prepared to invest in America. Now, these surplus countries, principally China and the major oil exporting nations, are beginning to bridle at the fact that the international value of their US assets is being depleted consistently by the dollar's continuous decline. Any reluctance on the part of these surplus countries to continue investing in dollar assets in the future would send the US currency into a freefall.

But, in the second place, the US is even more vulnerable to any disruption in the supply of imported oil. The long queues and rationing at gas stations during the oil embargo of 1973/74 have not faded from America's collective memory. Put simply, there is a clear consciousness within the political elite that the US economy would simply grind to a halt in the absence of imported oil.

This was echoed by the former chairman of the Federal Reserve, Dr Alan Greenspan who wrote in his recent book:

"I am saddened that it is politically inconvenient to acknowledge what everybody knows: the Iraq war is largely about oil. Thus projections about world oil supply and demand that do not note the highly precarious environment of the Middle East are avoiding the eight-hundred pound gorilla in the room that could bring world economic growth to a halt".

This interdependence of the economics and politics of energy in the US will become progressively apparent as the presidential election unfolds in the course of next year. For, in the last analysis, the economics of the US is the politics of oil.