SHOULD I CARE ABOUT TURMOIL IN WORLD OIL MARKETS?

For anyone who has filled a gas tank this week, it is clear that something is going on in world oil markets, but what is it and will it have a lasting impact?

The "what" is pretty easy: there was already an underlying global edginess about political upheaval in the Middle East - the source of some 60% of world oil reserves - and when the meltdown reached Libya, a significant supplier of high quality oil to Europe, it was enough to tip prices into a steeper rise.

The "impact" is a tougher question. Over the past several decades, the U.S. economy has become less coupled to oil, but it remains essential to mobility and many industrial processes, and we import more than 60% of what we use (and have less than two percent of world reserves). In short, the U.S. economy is inextricably tied to the world price of oil. Higher oil prices mean higher operating costs for businesses, which mean falling profits, less hiring, and cascading bad news. For consumers, it means higher prices for nearly everything.

Some of this is obvious, as at our local gas stations. Some is less obvious, such as rising food prices because it costs more to truck that tomato from Mexico. Either way, it means we spend less on other things, which is hard on the owners of everything from our local dry-cleaner to Target. Worse, emerging economies world-wide are growing markets for our exports, and also increasingly dependent on imported oil. Higher oil prices mean they have less to spend on our exports and it is yet another hit on the already fragile U.S. economy.

So what do we do about this? Ultimately, we have to opt for ways to reduce oil use. That can either be the involuntary result of rising and volatile global prices that we cannot control - with much of the money going to Canada, Saudi Arabia, etc. - or the result of a progressive fuel tax that offsets other taxes, discourages fuel use, encourages alternatives, and keep the money at home. Either way, as consumers and investors, we need to be aware of the likely impacts and plan our personal finances accordingly.