Order Code RS22204 Updated January 15, 2008 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 monthly volume 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 early 2007, before rising again through the summer and more sharply in the fall, 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 fluctuated sharply, at times rising considerably faster than the change in demand for those products. As a result, the price increases of imported energy-related petroleum products worsened the U.S. trade deficit in 2005 and 2006, and will do so again in 2007, although modestly. 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 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 11, 2008. 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 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. 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. From January-November 2007, the quantity of energy-related petroleum imports fell by 1.7% compared with the comparable period in 2006, while crude oil imports fell by 1.5% from the same period in 2006, reflecting a milder-than-normal winter in 2007. During the same eleven-month period, the average value of energy-related petroleum products imports rose by 6.1%, while the average value of crude oil imports rose by 5.7%. At these rates, the value of U.S. energy imports for 2007 would be slightly higher than those for 2006. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 407 barrels a month in 2006 and about 402 barrels a month in the January-November period of 2007. Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January through November 2006 2007 Value (thousands of dollars) Quantity (thousands of barrels) Quantity (thousands of barrels) Percent Value change (thousands of 2006 to dollars) 2007 Percent change 2006 to 2007 Total energyrelated Petroleum Products 4,499,138 $269,983,312 4,422,080 -1.7% $286,483,138 6.1% Crude oil 3,440,583 $200,818,503 3,390,083 -1.5% $212,321,512 5.7% January through December 2006 2007 (Actual values) (Estimated values) Quantity (thousands of barrels) Total energyrelated Petroleum Products 4,880,734 Value (thousands of dollars) $290,923,833 Quantity (thousands of barrels) 4,797,140 Percent Value change (thousands of 2006 to dollars) 2007 -1.7% $308,703,423 Percent change 2006 to 2007 6.1% Crude oil 3,734,229 $216,627,331 3,679,419 -1.5% $229,035,880 5.7% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 11, 2007. Table 17. Note: Estimates for January through December of 2007 were developed by CRS from data through eleven months of 2007 and data through 2006 published by the Census Bureau using a straight line extrapolation. CRS-3 Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products Millions of barrels 450 440 430 420 410 400 390 380 370 360 350 340 330 Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Sep Nov Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov 2005 2006 2007 Source: Department of Commerce 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 eleven months of 2007, indicates that there was a slower start to the seasonal rise in energy prices, compared with the sharp rise experienced in the spring of 2005 and 2006. Price data for the April-November period of 2007, however, show a sharp run-up in the price of imported energy in those months, which has continued into December 2007, compared with price data for 2006. In 2006, oil import prices peaked in August. 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 $31 billion in November Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products $34 Billions of dollars $32 $30 $28 $26 $24 $22 $20 $18 $16 Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Sep Nov Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov 2005 2006 2007 Source: Department of Commerce CRS-4 2007. The average price of imported oil in November 2007 was up 52% from the average price in November 2006, reflecting the continued run-up in imported oil prices in 2007, as indicated in Table 2. Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) Total energy-related petroleum productsa 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. 4,880,734 $290,923,833 3,734,229 10,231 $216,627,331 $58.01 Jan. - Nov. 4,499,138 269,983,312 3,440,583 10,301 200,818,503 58.37 August 440,997 29,872,301 336,528 10,856 22,255,220 66.13 September 413,902 25,786,512 316,381 10,546 19,740,688 62.40 October 395,656 22,055,963 308,602 9.955 17,119,687 55.47 November 380,813 20,208,933 299,010 9,967 15,615,178 52.22 December 381,597 20,940,521 293,645 9,472 15,808,828 53.84 4,422,080 286,483,138 3,390,083 10,150 212,321,512 62.63 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 April 402,043 24,238,490 304,775 10,159 17,456,146 57.28 May 426,026 26,934,778 320,208 10,329 19,006,138 59.36 June 413,312 26,654,260 321,260 10,709 19,580,491 60.95 July 406,427 27,769,362 310,320 10,010 20,344,172 65.56 August 416,130 28,988,603 319,197 10,297 21,733,947 68.09 September 387,135 27,146,183 297,503 9,917 20,383,148 68.51 October 405,860 30,079,622 316,184 10,199 22,919,110 72.49 November 392,500 31,947,251 303,411 10,114 24,168,187 79.65 2007 Jan. - Nov. Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. January 11, 2008. Table 17. a. Energy-related petroleum products is a term used by the Census Bureau and includes crude oil, petroleum preparations, and liquefied propane and butane gas. As a result of the overall rise in the value of energy-related imports in 2006, the trade deficit of such imports rose to $270 billion to account for 32% of the total $836 billion U.S. trade deficit, up from one-fifth of the total trade deficit in less than two years. In the January-November 2007 period, the trade deficit in energy-related imports amounted to $261 billion, or 35% of the total U.S. trade deficit of $744 billion. The oil-related deficit in November, however, accounted for 41% of the U.S. trade deficit for that month, the highest share recorded since 1998. CRS-5 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% of the merchandise trade deficit due to higher oil prices. As long as the quantity of energy imports for the rest of 2007 remains below the quantity experienced in 2006, the total price of U.S. energy imports likely will be about $20 billion above that for 2006, as a result of the rise in the prices of imported energy in the October-December period of 2007. 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 testimony before Congress, Federal Reserve Board Chairman Ben Bernanke indicated that the rise in oil prices, along with other commodity prices, likely would increase the overall rate of inflation in the economy, an important consideration in policy-making by the Federal Reserve.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 10.23 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 crude oil imports based on January through November data indicate that oil volumes had decreased by 1.5% in 2007 from the comparable period in 2006. 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. Figure 3. U.S. Import Price of Crude Oil Dollars per barrel $80 $78 $76 $74 $72 $70 $68 $66 $64 $62 $60 $58 $56 $54 $52 $50 $48 $46 $44 Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Sep Nov Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov 2006 2005 2007 Source: Department of Commerce 2 Bernanke, Ben, The Economic Outlook, Testimony Before the Joint Economic Committee, U.S. Congress, November 8, 2007. 3 Report FT900, U.S. International Trade in Goods and Services, January 11, 2008. Table 17. CRS-6 Data for 2007 indicate that a milder-than-normal winter reduced crude oil imports through July 2007 compared with comparable data for 2006 and average oil import prices, which had dropped nearly 4% from the average prices recorded in January 2007, started rising after March. The declines in prices and volumes of oil imports experienced in January and February, turned around in the April to September period, although import volumes continue to lag behind those recorded for the comparable period in 2006. Data for October and preliminary data for November and December 2007 presage higher energy-related imports costs in those months. Average crude oil prices in October 2007 were nearly 40% higher than in January 2007. Also, on November 8, 2007, crude oil traded for a record high of over $98 per barrel in world markets, before falling back to about $91 per barrel the following week.4 At an average price of $80 per barrel, energyrelated import prices could add as much as $100 billion to the U.S. trade deficit in 2008 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 as rapidly again in 2007, especially in the late spring-early summer period of 2007. An important factor is the impact Atlantic hurricanes have on the production of crude oil in the Gulf of Mexico Most immediately, higher prices for 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. 4 Wong, Gillian, Oil Prices Rebound in Asian Trading, The Washington Post. November 14, 2007.