Order Code RS22204 Updated January 20, 2006 CRS Report for Congress Received through the CRS Web U.S. Trade Deficit and the Impact of Rising Oil Prices James K. Jackson Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division Summary Petroleum prices have risen sharply since early 2004. At the same time the average amount of imports of energy-related petroleum products has risen slightly. The combination of sharply rising prices and a slightly higher level of imports of energyrelated petroleum products translates into an escalating cost for those imports. This rising cost could add an estimated $70 billion to the nation’s trade deficit in 2005, depending on how sustainable are the recent price increases. This report provides an estimate of the initial impact of the rising oil prices on the nation’s merchandise trade deficit. This report will be updated as warranted by events. Background According to data published by the Census Bureau of the Department of Commerce,1 the prices of petroleum products over the past year have risen considerably faster than the change in demand for those products. As a result, it is estimated that the price increases of imported energy-related petroleum products will worsen the U.S. trade deficit in 2005. Energy-related petroleum products is a term used by the Census Bureau and includes crude oil, petroleum preparations, and liquefied propane and butane gas. Crude oil comprises the largest share by far within this broad category of energy-related imports. The increase in the trade deficit is expected to have a slightly negative impact on U.S. gross domestic product (GDP) and could place further downward pressure on the dollar against a broad range of other currencies. To the extent that the additions to the merchandise trade deficit are returned to the U.S. economy as payment for additional U.S. exports or to acquire such assets as securities or U.S. businesses, some of the negative effects could be mitigated. 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 12, 2006. Table 17. The report and supporting tables are available at [http://www.census.gov/foreign-trade/Press-Release/current_press_release/ftdpress.pdf]. Congressional Research Service ˜ The Library of Congress CRS-2 Table 1 presents summary data from the Census Bureau for the change in the volume, or quantity, of energy-related petroleum imports and the change in the price, or the value, of those imports for 2004 and for the first eleven months of 2005. Based on the data for the January through November 2005 period, estimates are provided for the values for the full year 2005. Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January through November 2004 2005 Value (thousands of dollars) Quantity (thousands of barrels) Quantity (thousands of barrels) Percent Value change (thousands of 2004 to dollars) 2005 Percent change 2004 to 2005 Total energyrelated Petroleum Products 4,507,185 $159,218,460 4,583,579 1.7% $221,807,148 39.3% Crude oil 3,500,393 $120,053,553 3,441,604 -1.7% $160,062,321 33.3% January through December 2004 2005 (Actual values) (Estimated values) Quantity (thousands of barrels) Value (thousands of dollars) Quantity (thousands of barrels) Percent Value change (thousands of 2004 to dollars) 2005 Percent change 2004 to 2005 Total energyrelated Petroleum Products 4,917,591 $174,499,173 5,000,941 1.7% $243,094,701 39.3% Crude oil 3,820,979 $131,742,664 3,756,806 -1.7% $175,646,918 33.3% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 12, 2006. Table 17. Note: Estimates for January through December of 2005 were developed by CRS from data through the first eleven months of 2005 published by the Census Bureau using a straight line extrapolation. The data indicate that the United States imported 4.9 billion barrels of total energyrelated petroleum products in 2004, valued at $174 billion. In the January through November period, imports increased from a total of 4.5 billion barrels in 2004 to 4.6 billion barrels in 2005, for an increase in the volume of total energy-related petroleum products imports of 1.7%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 410 million barrels a month in 2004 and 417 barrels a month from January to November 2005. In value terms, energy-related imports in the January-November period rose from over $159 billion in 2004 to $222 billion in 2005, or an increase of 39.3%. As Figure 2 shows, the cost of U.S. imports of energy-related petroleum products has risen from about CRS-3 Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products 450 Millions of barrels 440 430 420 410 400 390 380 370 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 2004 2005 Source: Department of Commerce $11.5 billion per month in early 2004 to over $26 billion a month in November 2005. Based on the data for the January-November 2005 period, imports of total energy-related petroleum products for the full year 2005 are projected to rise to 5.0 billion barrels from 4.9 billion barrels in 2004 and to rise in value to an estimated $243 billion from the $174 billion spent in 2004 on such imports, or an increase in the U.S. trade deficit by an estimated $70 billion due to the increase in oil prices. This estimate of the value of energy-related petroleum products imports is based on an increase in the quantity of imports at the current rate and on prices at the November 2005 level. This estimate could be higher as a result of fluctuations in oil prices that occurred in early December. If oil import prices hold in the range of $60 per barrel throughout 2006, the U.S. trade deficit in energy trade could rise by another $50 billion to reach $300 billion. Figure 2. U.S. Import Price Per Barrel of Crude Oil Dollars per barrel $58 $56 $54 $52 $50 $48 $46 $44 $42 $40 $38 $36 $34 $32 $30 $28 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Source: Department of Commerce 2004 2005 CRS-4 At an average price of $52 per barrel in November 2005, oil prices had moderated slightly from the average price of $57 per barrel reached in September 2005. If the price of $52 per barrel were maintained for the remaining two months of 2005 from November to December, the estimated cost for imports of energy-related petroleum products could total about $243 billion, or an increase in the trade deficit over 2004 of about $70 billion. As a result of this sharp rise in the value of energy-related imports, such imports now account for one-third of the total value of the U.S. trade deficit, up from one-fifth in less than two years, but still account for less than the average share during much of the 1990s, when such imports could account for half of the overall U.S. trade deficit. Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) Total energy-related petroleum products a Period Quantity Value (thousands (thousands of of barrels) dollars) Crude oil Quantity (thousands of barrels) Thousands of Value Unit barrels per (thousands of price day (average) dollars) (dollars) 2004 Jan.- Dec. 4,917,591 $174,499,173 3,820,979 10,440 $131,742,664 $34.48 Jan.- Nov. 4,507,185 159,218,460 3,500,393 10,449 120,053,553 34.30 May 398,862 13,815,254 317,854 10,253 10,534,772 33.14 June 432,235 15,124,648 344,729 11,491 11,631,044 33.74 July 414,258 14,411,409 324,108 10,455 10,817,829 33.38 August 437,516 16,400,730 333,756 10,766 12,196,274 36.54 September 377,861 14,557,549 297,013 9,900 11,142,685 37.52 October 408,187 17,557,812 313,249 10,105 13,107,077 41.84 November 439,794 17,892,337 329,660 10,989 13,577,287 41.19 December 410,406 15,280,713 320,586 10,341 11,689,111 36.46 4,583,579 221,807,148 3,441,604 10,304 160,062,321 46.51 January 416,368 15,226,958 322,803 10,413 11,410,258 35.35 February 389,832 14,947,342 296,929 10,605 10,942,242 36.85 March 420,260 17,955,052 325,979 10,515 13,410,140 41.14 April 410,265 18,941,511 313,811 10,460 14,044,645 44.76 May 418,308 18,608,834 318,630 10,278 13,726,092 43.08 June 432,053 19,928,053 328,321 10,944 14,577,503 44.40 July 417,911 20,968,576 312,022 10,065 15,297,700 49.03 August 428,305 23,181,368 325,814 10,510 17,155,252 52.65 September 388,809 23,176,557 278,453 9,282 15,961,823 57.32 October 440,383 26,161,721 304,482 9,822 17,139,812 56.29 November 421,086 22,714,175 314,361 10,479 16,396,855 52.16 2005 Jan.-Nov. Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. January 12, 2006. Table 17. Note: Energy-related petroleum products is a term used by the Census Bureau and includes crude oil, petroleum preparations, and liquefied propane and butane gas. CRS-5 Due to the variability in oil prices, it is not possible to provide a precise estimate of the annual merchandise trade deficit for 2005 that will arise as a result of the increase in oil prices, but it is reasonable to assume that the trade deficit in 2005 could rise by about $70 billion, an amount equivalent to an increase of at least 9% in the merchandise trade deficit due to higher oil prices. In terms of the U.S. economy, the estimated rise in the trade deficit from the increase in oil prices is equivalent to about one-half of a percentage point of U.S. nominal GDP. In a letter to Congress’ Joint Economic Committee, Federal Reserve Board Chairman Alan Greenspan estimated that higher energy prices since the end of 2003 have lowered U.S. GDP by three-fourths of a percentage point in 2005 after having reduced growth by about one-half a point in 2004.2 Crude oil comprises the largest share of energy-related petroleum products imports. According to Census Bureau data3 as shown in Table 2, imports of crude oil fell from an average of 10.4 million barrels of crude oil imports per day in the January-November 2004 period to an average of 10.3 million barrels per day in the January-November 2005 period, or a decrease of 0.9 %. At the same time, the average price of crude oil increased from $28.57 per barrel in January 2004 to $52.16 per barrel in November 2005 for an increase of 83%. As a result, the value of U.S. energy-related imports rose from about $11.6 billion a month in January 2004 to about $23 billion a month in November 2005, as shown in Figure 3. The data also indicate, however, that the average prices for crude oil can vary considerably from month to month, depending on a range of factors. Figure 3. Value of U.S. Imports of Energy-Related Petroleum Products Billions of dollars $27 $26 $25 $24 $23 $22 $21 $20 $19 $18 $17 $16 $15 $14 $13 $12 $11 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Source: Department of Commerce 2004 2005 2 Aversa, Jeannine, “Oil Prices Said to Slow U.S. Economy a Bit.” The Washington Post, July 18, 2005. 3 Report FT900, U.S. International Trade in Goods and Services, January 12, 2006. Table 17. CRS-6 Issues for Congress The rise in prices of energy imports experienced since early 2004 is expected to have a relatively minor impact on the rate of economic growth through the remainder of the year, but could pose a number of policy issues for Congress. The impact of the rise in energy import prices so far could become more pronounced if such prices continue to rise at the rapid rate experienced in the late spring-early summer period of 2005. Most immediately, the higher prices of energy imports will worsen the nation’s merchandise trade deficit and have a disproportionate impact on the energy-intensive sectors of the economy and on households on fixed incomes. The full impact of such price increases on the trade deficit will be more fully understood once it is known how high and how rapidly they have climbed through the remainder of the year. Over the long run, a sustained increase in the prices of energy imports will permanently increase the nation’s merchandise trade deficit, although some of this impact could be offset if some of the dollars are returned to the U.S. economy through increased purchases of U.S. goods and services or through purchases of such other assets as securities or U.S. businesses. Also, over the long-run it is possible for the economy to adjust to the higher prices of energy imports by improving its energy efficiency, finding alternative sources of energy, or searching out additional supplies of energy. For Congress, the increase in the nation’s merchandise trade deficit could add to existing pressures to examine the causes of the deficit and to address the underlying factors that are generating that deficit. In addition, the rise in prices of energy imports could add to concerns about the nation’s reliance on foreign supplies for energy imports and add impetus to examining the nation’s energy strategy. The increased outflow of dollars may well add to public and Congressional concerns about foreign acquisitions of U.S. firms and to concerns about the growing share of outstanding U.S. Treasury securities that are owned by foreigners. While the rise in energy prices can be expected to lead eventually to improvements in energy efficiency and to alternative sources of energy, there may well be increased pressure applied to Congress to assist in this process.