The U.S. Oil Boom and the Trade Deficit

by Reihan Salam

Matthew Phillips explains how the U.S. oil boom has contributed to a shrinking U.S. trade deficit:

According to Scott Anderson, chief U.S. economist at Bank of the West, from 1996 to 2006 the widening trade imbalance chewed an average of 0.5 percentage points off GDP growth each year.

Now that U.S. refiners are replacing imported crude with domestic oil from North Dakota, Texas, and Oklahoma, trade is starting to be less of a drag on the economy. In 2011, the U.S. became a net exporter of petroleum products for the first time in 60 years. The U.S. has always been a refining powerhouse, particularly along the Gulf Coast, which accounts for about 70 percent of all U.S. petroleum exports. Now that refiners have an abundant supply of high quality, relatively cheap crude to tap domestically, they can really flex their muscles abroad.

Mark Mills of the Manhattan Institute has called for building on this momentum:

Today, oil imports account for about 40 percent of America’s $750 billion annual trade deficit, a deficit that drains the GDP and kills jobs. Expanding the domestic production of hydrocarbons to reduce imports as well as increase exports will function as an enormous subsidy-free stimulus to the U.S. economy, directly creating all manner of jobs across the nation and indirectly creating millions more jobs as the nation’s current account deficit shrinks.

Increased production and exports of oil and gas and of energy-intensive products from chemicals to fertilizers can put the nation on track to wipe out the entire trade deficit within the decade, returning the nation to a trade balance—even a surplus—that has not been enjoyed for decades. This process has already begun: increasing exports of U.S. refined petroleum products are already pushing the trade deficit down.

Mills has also called for a North American Common Energy Market, to create a free flow of cross-border energy projects, from pipelines to transmission lines, with Canada and Mexico:

The North American continent has more than double the oil and gas resources of the entire Middle East. Unleashing North America’s capabilities would ignite jobs and growth from the Yucatán Peninsula to the Arctic Circle. In less than two decades, North America could surpass Middle Eastern production and become the dominant player in global energy markets.

Moreover, the U.S. oil boom has significant geopolitical implications, e.g., it has led to a significant deterioration of Russia’s wealth and influence.

Jim Pethokoukis suggests that the shale revolution helped secure President Obama’s reelection, as unemployment would likely have been higher in its absence while disposable income would have been lower. And IHS Global Insight anticipates that unconventional U.S. oil and gas production will continue delivering substantial economic gains over the next decade:

Unconventional oil and gas activity increased disposable income by an average of $1,200 per US household in 2012 in the form of lower energy bills as well as lower costs for all other goods and services. That figure is expected to grow to just over $2,000 in 2015 and reach more than $3,500 in 2025.

Michael Levi of the Council on Foreign Relations offers a more measured perspective. If the OPEC states decide to start flooding the market, the U.S. supply boom will grind to a halt.