Order Code RS22204 Updated May 30, 2007 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 $50 billion in 2006. Imported energy prices moderated in January and February 2007, but began rising again in March and April, following a pattern of rising energy import prices in the spring and summer. 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 2006. Energyrelated 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. exports or to acquire 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, May 10, 2007. 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 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 2006 and for 2007. The data indicate that the United States imported 4.9 billion barrels of total energy-related petroleum products in 2006, valued at $291 billion. Through March 2007, the quantity of energy-related petroleum imports fell by 1.7%, while crude oil imports fell by 1.0% from the same period in 2006, reflecting a milder-than-normal winter. During the same period, the value of energy-related petroleum products imports fell by 3.3%, while the value of crude oil imports fell by 2.0%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 410 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 March 2006 Quantity (thousands of barrels) Total energyrelated Petroleum Products Crude oil 2007 Value (thousands of dollars) Quantity (thousands of barrels) Percent Value change (thousands of 2005 to dollars) 2006 Percent change 2005 to 2006 1,192,492 $64,835,087 1,172,648 -1.7% $62,724,590 -3.3% 906,323 $47,690,720 897,225 -1.0% $46,730,174 -2.0% January through December 2006 2007 (Actual values) (Estimated values) Quantity (thousands of barrels) Total energyrelated Petroleum Products 4,887,772 Value (thousands of dollars) $291,285,295 Quantity (thousands of barrels) 4,806,436 Percent Value change (thousands of 2004 to dollars) 2005 -1.7% $281,803,442 Percent change 2004 to 2005 -9.1% Crude oil 3,741,205 $216,998,507 3,703,649 -1.0% $212,627,907 -5.8% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, May 10, 2007. Table 17. Note: Estimates for January through December of 2007 were developed by CRS from data through the first three months of 2007 and data through 2006 published by the Census Bureau using a straight line extrapolation. In value terms, energy-related imports rose from about $243 billion in 2005 to $291 billion in 2006, or an increase of 19.6% to account for about 16% of the value of total U.S. merchandise imports. An estimate for 2007, based on data for the first three months of 2007, indicate a slow start to the seasonal rise in energy prices, compared with the CRS-3 Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products Millions of barrels 460 450 440 430 420 410 400 390 380 370 360 350 340 330 Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov Jan Mar Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb 2005 2006 2007 Source: Department of Commerce sharp rise experienced in 2005 and 2006. Price data for April and May 2007, however, show a sharp run-up in the price of imported energy in those months and likely will exert considerable upward pressure on forthcoming estimates of the total cost of energy imports for 2007. As Figure 2 shows, the cost of U.S. imports of energy-related petroleum products has risen from about $15 billion per month in early 2005 to more than $30 billion a month in August 2006, before falling back to $20 billion a month in December 2006 and $23 billion in March 2007. Data for 2006 indicate that a slight decrease in the quantity of imports combined with nearly a 20% increase in the price of imported energy products caused the U.S. trade deficit in energy to rise by about $50 billion to reach nearly $300 billion. After rising steadily since March 2006, the average price of oil retreated in September through November before rising slightly again in December 2006. 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 Nov Jan Mar Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb 2005 2006 2007 Source: Department of Commerce CRS-4 At an average price of $58 per barrel in 2006, average oil import prices are 24% higher than they were in the comparable period in 2005, as indicated in Table 2. As a result of the overall rise in the value of energy-related imports in 2006, such imports now account for about 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 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) 2006 Jan. - Dec. 4,887,772 291,285,295 3,741205 10,250 216,998,507 58.00 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 November 381,230 20,238,356 299,401 9,980 15,642,961 52.25 December 380,861 20,890,421 293,538 9,469 15,803,122 53.84 January 418,158 22,010,536 320,108 10,326 16,720,818 52.23 February 331,818 17,347,440 252,869 9,031 12,822,771 50.71 March 422,671 23,366,614 324,248 10,460 17,186,586 53.00 2007 Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. May 10, 2007. 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. Recent data indicate that the drop in imported energy prices to about $54 per barrel toward the end of 2006 from the high of an average of $66 per barrel reached in August 2006 helped reduce the overall cost of energy imports so that the trade deficit in 2006 rose by about $50 billion, an amount equivalent to an increase of about 7% 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 CRS-5 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 10.28 million barrels of crude oil imports per day in 2005 to an average of 10.25 million barrels per day in 2006, or a decrease of less than one percent. In December 2006, such imports averaged 9.5 million barrels per day, or a decrease of 6.6% from the volume of such imports recorded in December 2005. Overall, data for oil imports based on year-over-year data indicate that oil volumes decreased by 0.4% in 2006 from the respective period in 2005. From 2005 to 2006, the average price of crude oil increased from $46.81 per barrel to $58.00 per barrel for an increase of 24%, 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 $30 billion a month in September 2006, before falling to $21 billion a month in December 2006, the lowest monthly total recorded since July 2005. Data for 2007 indicate that a milder-than-normal winter reduced crude oil imports through March 2007 and average oil import prices, which had dropped nearly 4% from the average prices recorded in January 2007, started rising in March. The declines in prices and volumes of oil imports experienced in January and February, however, likely will turn around sharply in April and May, when both import volumes and import prices started moving higher. 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 Nov Jan Mar Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb 2005 2006 2007 Source: Department of Commerce 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, May 10, 2007. 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 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.