Order Code RS22204 Updated December 13, 2006 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 2005. At the same time the average amount of imports of energy-related petroleum products has fallen slightly. The combination of sharply rising prices and a slightly lower level of imports of energyrelated petroleum products translates into an escalating cost for those imports. This rising cost added an estimated $70 billion to the nation’s trade deficit in 2005 and could add another $60 to $70 billion in 2006, depending on the course of energy import prices over the remainder of 2006. 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, the price increases of imported energyrelated petroleum products worsened the U.S. trade deficit in 2005 and likely will do so again in 2006. Energy-related petroleum products is a term used by the Census Bureau that 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. 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, December 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]. CRS-2 exports or to acquire such assets as securities or U.S. businesses, some of the negative effects could be mitigated. 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 2005 and for 2006. The data indicate that the United States imported 5.0 billion barrels of total energy-related petroleum products in 2005, valued at $243 billion. In January through October 2006, the quantity of imports decreased slightly form the same period in 2005 as the volume of energy-related petroleum products imports fell 0.9%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 417 barrels a month in 2005 and about 413 barrels a month in 2006. Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January through October 2005 2006 Value (thousands of dollars) Quantity (thousands of barrels) Quantity (thousands of barrels) Percent Value change (thousands of 2005 to dollars) 2006 Percent change 2005 to 2006 Total energyrelated Petroleum Products 4,163,970 $199,267,665 4,125,681 -0.9% $250,156,518 25.5% Crude oil 3,126,382 $143,726,863 3,148,267 0.7% $185,552,424 29.1% January through December 2005 2006 (Actual values) (Estimated values) Quantity (thousands of barrels) Total energyrelated Petroleum Products 5,004,339 Value (thousands of dollars) $243,496,863 Quantity (thousands of barrels) 4,958323 Percent Value change (thousands of 2004 to dollars) 2005 -0.9% $305,680,941 Percent change 2004 to 2005 25.5% Crude oil 3,754,669 $175,755,341 3,780,952 0.7% $226,901,422 29.1% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, December 12, 2006. Table 17. Note: Estimates for January through December of 2006 were developed by CRS from data through the first ten months of 2006 and data through 2005 published by the Census Bureau using a straight line extrapolation. In value terms, energy-related imports rose from about $199 billion in JanuaryOctober 2005 to $250 billion in the same period in 2006, or an increase of 31.2%. If the rate of price increases experienced through October 2006 hold for the year, the value of U.S. energy-related imports could rise to $300-$320 billion in 2006, or more than $60-$70 billion more than in 2005. As Figure 2 shows, the cost of U.S. imports of energy-related petroleum products has risen from about $18 billion per month in early 2005 to more than CRS-3 $22 billion a month in October 2006. Based on the data for 2005, the increase in the price of imports of total energy-related petroleum products added $70 billion to the annual U.S. trade deficit. An estimate for 2006 indicates that an increase in the quantity of imports at the current rate and if oil import prices hold in the range of $60-$65 per barrel throughout 2006, the U.S. trade deficit in energy trade could rise by more than $60-$70 billion to reach about $306 billion. After rising steadily since March 2006, the average price of oil retreated in September and October, to fall below the price set in October 2005. A continued decline in prices, or even a leveling out of prices, could reduce the estimated impact of oil prices on the trade deficit in 2006 below $60 billion. Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products 460 Millions of barrels 450 440 430 420 410 400 390 380 370 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 2006 2005 Source: Department of Commerce Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products $32 Billions of dollars $30 $28 $26 $24 $22 $20 $18 $16 $14 $12 $10 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 2005 2006 Source: Department of Commerce CRS-4 At an average price of $59 per barrel in the January-October 2006 period, average oil import prices are 28% higher than they were in the comparable period in 2005, as indicated in Table 2. As a result of this sharp rise in the value of energy-related imports in 2006, such imports now account for nearly 40% 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 at times accounted 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) 2005 Jan - Dec. 5,004,339 243,496,863 3,754,669 10,287 175,755,341 46.81 Jan.- Oct. 4,163,970 199,267,665 3,126,382 10,284 143,726,863 45.97 March 418,418 17,923,939 324,180 10,457 13,383,428 41.28 April 413,267 19,086,805 315,528 10,518 14,128,664 44.78 May 420,464 18,688,573 319,982 10,322 13,773,585 43.04 June 430,594 19,878,379 327,865 10,929 14,559,106 44.41 July 419,157 21,046,507 312,106 10,068 15,314,485 49.07 August 433,073 23,534,564 329,039 10,614 17,391,215 52.85 September 389,645 23,332,358 277,589 9,253 15,938,226 57.42 October 432,162 25,567,322 300,884 9,706 16,911,547 56.21 November 422,459 22,790,054 314,028 10,468 16,380,931 52.16 December 417,910 21,439,144 314,259 10,137 15.647,547 49.79 4,125,681 250,156,518 3,148,267 10,356 185,552,424 58.94 January 415,788 22,579,751 302,812 9,768 15,724,715 51.93 February 378,721 20,738,047 291,032 10,394 15,635,550 53.72 March 397,983 21,517,289 312,479 10,080 16,330,455 52.26 April 392,159 23,396,506 293,844 9,795 16,695,611 56.82 May 433,399 27,906,197 323,827 10,446 19,992,671 61.74 June 420,067 26,958,936 330,862 11,029 20,527,259 62.04 July 423,624 28,438,931 321,576 10,373 20,849,998 64.84 August 450,451 30,497,305 343,485 11,080 22,710,736 66.12 September 413,659 25,808,397 316,591 10,553 19,792,869 62.52 October 399,830 22,315,158 311,758 10,057 17,292,560 55.47 2006 Jan. - Oct. Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. December 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 2006 that will arise as a result of the increase in oil prices, but it is reasonable to assume that the trade deficit in 2006 could rise by about $60 - $70 billion, an amount equivalent to an increase of at least 8% 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 in 2005 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 rose from an average of 10.28 million barrels of crude oil imports per day in 2005 to an average of 10.36 million barrels per day in 2006, or an increase of about 10%. In October 2006, such imports averaged 10.1 million barrels per day, or an increase of 4.0% over the volume of such imports recorded in October 2005, although oil imports based on year-over-year data for January-October indicate that oil volumes decreased by 0.9% in 2006 from the respective period in 2005. From January to October 2005 to the same ten-month period in 2006, the average price of crude oil increased from $45.97 per barrel to $58.94 per barrel in 2006 for an increase of 28%, as shown in Figure 3. As a result, the value of U.S. energy-related imports rose from about $18 billion a month in March 2005 to about $22 billion a month in October 2006. In September and October 2006, crude oil prices retreated from the rise experienced throughout much of 2006 and fell to about $55 per Figure 3. U.S. Import Price of Crude Oil Dollars per barrel $68 $66 $64 $62 $60 $58 $56 $54 $52 $50 $48 $46 $44 $42 $40 $38 $36 $34 $32 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct 2006 2005 Source: Department of Commerce barrel, or a decrease of 1.3% from the price of a barrel of oil in October 2005. As a result, 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, December 12, 2006. Table 17. CRS-6 the cost of total energy imports fell to $22.3 billion in October 2006, down from the peak of $30.5 billion a month recorded in August 2006. 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 in 2006, but could pose a number of policy issues for Congress. The impact of the rise in energy import prices may well lessen somewhat as energy prices stabilize of fall slightly for the rest of 2006. It is likely, however, that energy prices will rise rapidly again in 2007, especially in the late spring-early summer period of 2007. 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. 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.