09/21/2010 11:23 am ET Updated May 25, 2011

Obama's Fiscal Stimulus No Substitute for Cheap Oil

There is nothing intrinsically wrong with President Obama's earmarking $50 billion for new transport infrastructure, or extending the Bush tax cuts to low- and middle-income American households--provided the country can afford them. But already burdened with a record budget deficit of over one trillion dollars, most Americans probably think Washington's already done far too much for the economy as it is.

After all, there seems precious little to show for all the fiscal stimulus. The US jobless rate seems stuck at around nine and a half per cent, and the GDP remains miles below its pre-recession peak. And although the economy is indeed growing, its pace is a shadow of past recoveries, and a fraction of last cycle's growth rates.

It's those very economic failings that compel the White House to try to bring even further stimulus to bear on the US economy. But implicit in this strategy is the belief that today's economy can be force-fed more government spending and tax cuts to achieve yesterday's rate of growth.

What's being overlooked is that last cycle's rate of growth was fueled for the most part with cheap oil--oil was below $30 a barrel for the first half of the period. Even today's oil prices weren't encountered until the last year of growth. That's not incidental to the performance of the world's largest oil-consuming economy, which relies on imports for over half of its 19-million-barrel-a-day requirement.

Feed the US economy cheap oil, and you'll see robust growth rates and a drop in the jobless rate to four-decade lows--no matter who's in the White House. But throw in $147-per-barrel oil, and the US economy stops dead in its tracks.

Unfortunately, President Obama can't bring back the cheap oil prices that fueled most of last cycle's growth. The recent BP disaster in the Gulf of Mexico probably drove the final nail into the coffin of the last frontier of untapped domestic supply--deep water.

He may be able to get oil from Canadian tar sands (provided the Environmental Protection Agency approves Transcanada's proposed Keystone XL pipeline) before China can siphon it off through the competing pipeline Enbridge wants to build to the west coast. But even if he is able to secure tar sands fuel for American motorists, the price of that oil will have to be very near triple digits or it won't flow in nearly the quantities needed.

The age of cheap oil is over, and that means recalibrating the speed limit for the world's largest oil-consuming economy. In a world of $75-per-barrel to triple-digit oil prices, the US economy is not likely to grow more than by 1 to 2 per cent per year until it can curb its oil appetite significantly.

Trying to substitute fiscal stimulus for cheap oil won't make the American economy grow any faster. It will just make an already record-sized deficit that much bigger.