Order Code RS22204 Updated June 10, 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 continued to rise sharply in 2008, at one time reaching nearly $140 per barrel of crude oil. 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 energy-related petroleum products translates into an escalating cost for those imports. This rising cost added an estimated $50 billion to the nation’s trade deficit in 2006 and another $28 billion in 2007. The prices of energy imports have been on a steady rise since summer of 2007, defying the pattern of declining energy import prices in the fall. 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 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 2006 and 2007, and again in 2008. 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 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, June 10, 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 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 2007 and for 2008. The data indicate that the United States imported 4.8 billion barrels of total energy-related petroleum products in 2007, valued at $319 billion. In the January-April period of 2008, the quantity of energy-related petroleum imports fell by 1.8% compared with the comparable period in 2007; crude oil imports also fell by 2.4% from the same period in 2007. Year-over-year, the average value of energy-related petroleum products imports rose by 59%, while the average value of crude oil imports rose by 64.7%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 401 barrels a month in the January-December period of 2007. Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January through April 2007 2008 Value (thousands of dollars) Quantity (thousands of barrels) Quantity (thousands of barrels) Percent Value change (thousands of 2007 to dollars) 2008 Percent change 2007 to 2008 Total energyrelated Petroleum Products 1,577,006 $87,069,176 1,539,411 -2.4% $138,524,516 59.1% Crude oil 1,202,770 $64,221,483 1,190,310 -1.0% $105,745,825 64.7% January through December 2007 2008 (Actual values) (Estimated values) Quantity (thousands of barrels) Total energyrelated Petroleum Products 4,808,832 Value (thousands of dollars) $318,873,367 Quantity (thousands of barrels) 4,694,192 Percent Value change (thousands of 2007 to dollars) 2008 -2.4% $507,318,214 Percent change 2007 to 2008 59.1% Crude oil 3,690,924 $237,217,636 3,652,688 -1.0% $390,597,872 64.7% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, June 10, 2008. Table 17. Note: Estimates for January through December of 2008 were developed by CRS from data through April 2008 and data through 2007 published by the Census Bureau using a straight line extrapolation. In value terms, energy-related imports rose from about $291 billion in 2006 to $319 in 2007, or an increase of 9.6% to account for about 17% of the value of total U.S. merchandise imports. Data for 2008 indicate that the sharp rise experienced in energy prices in 2007 continued in January through April 2008, not following previous trends of falling during the winter months. As Figure 2 shows, the cost of U.S. imports of energy- CRS-3 related petroleum products has risen from about $17 billion per month in early 2007 to $38 billion a month in April 2008. The average price of imported oil in April 2008 was up 69% from the average price in April 2007, reflecting the continued run-up in imported oil prices in 2007 and 2008, as indicated in Table 2. 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 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb. Apr May Jly Sep Nov Jan Mar May Jly Sep Nov Jan Mar 2006 2008 2007 Source: Department of Commerce Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products Billions of dollars $40 $38 $36 $34 $32 $30 $28 $26 $24 $22 $20 $18 $16 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr May Jly Sep Nov Jan Mar May Jly Sep Nov Jan Mar 2006 2007 2008 Source: Department of Commerce CRS-4 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) 2007 Jan.- Dec. 4,808,832 $918,873,367 3,690,924 10,112 $237,217,636 $64.27 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 December 386,751 32,390,228 300,841 9,705 24,896,124 82.76 January 420,916 $35,836,371 322,206 10,394 $27,093,581 $84.09 February 367,098 31,356,495 286,483 9,879 24,281,817 84.79 March 363,252 33,146,123 278,571 8,986 25,030,666 89.85 2008 April 388,145 38,185,528 303,050 10,102 29,339,760 96.81 Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. June 10, 2008. 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. As a result of the overall rise in the value of energy-related imports in 2007, the trade deficit of such imports rose to $293 billion to account for 36% of the total $815 billion U.S. trade deficit, up from one-fifth of the total trade deficit in less than two years. In January-April 2008, the trade deficit in energy-related imports amounted to $132 billion, or 47% of the total U.S. trade deficit of $284 billion for the four-month period. The quantity of energy imports in 2007 fell by 1.5% below the quantity imported in 2006, but the total price of U.S. energy imports roe by about $28 billion in 2007 above that for 2006, largely as a result of the continued rise in the prices of imported energy in the October-December period of 2007. In testimony before Congress, Federal Reserve Board Chairman Ben Bernanke indicated that the rise in oil prices, along with other CRS-5 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 10.23 million barrels of crude oil imports per day in 2006 to an average of 10.15 million barrels per day in 2007, or a decrease of 1.2%. In December 2007, such imports averaged 9.7 million barrels per day, or an increase of 2.5% over the volume of such imports recorded in December 2006. Data for crude oil imports in 2007 indicate that the total quantity of imported oil decreased by 1.2% from the comparable period in 2006. In December 2007, however, despite a 57% rise in the price of crude oil imports year over year, average crude oil imports rose by about 2.5% from December 2006. From April 2007 to April 2008, the average price of crude oil increased from $57 per barrel to $97 per barrel for an increase of 70%, as shown in Figure 3. As a result, the value of U.S. crude oil imports rose from about $24 billion a month in April 2007 to $38 billion a month in April 2008. Figure 3. U.S. Import Price of Crude Oil Dollars per barrel $100 $96 $92 $88 $84 $80 $76 $72 $68 $64 $60 $56 $52 $48 Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr May Jly Sep Nov Jan Mar May Jly Sep Nov Jan Mar 2006 2007 2008 Source: Department of Commerce Data for the January-April 2008 period indicate that a number of factors combined to push oil prices to record levels.. The sharp rise in prices combined with a small decrease in the volumes of oil imports experienced in April combined to post a large jump in the overall cost of imported energy. At times, crude oil traded for nearly $140 per barrel in June 2008, indicating that the cost of energy imports will have a significant impact on the overall costs of U.S. imports and on the value of the U.S. trade deficit. With current expected volumes of energy-related petroleum products imports and at an average price of $110 per barrel, energy-related import prices could add nearly $200 2 Bernanke, Ben, The Economy and Financial Markets, Testimony Before the Banking, Housing, and Urban Affairs Committee, U.S. Senate, February 14, 2008. 3 Report FT900, U.S. International Trade in Goods and Services, June 10, 2008. Table 17. CRS-6 billion to the trade deficit on an annual basis, pushing the annual trade deficit to over $1 trillion. With current expected volumes of energy-related petroleum products imports and at an average price of $120 per barrel, energy-related import prices could add $240 billion to the annual trade deficit. Similarly, at a price of $140 per barrel, energy-related import prices could add more than $320 billion to the annual trade deficit. Issues for Congress The sharp rise in prices of energy imports experienced since early 2007 is expected to affect the U.S. rate of inflation, likely will have a slightly negative impact on the rate of economic growth in 2008, and pose a number of policy issues for Congress. Various factors are combining to push up the cost of energy imports to record levels at a time when they traditionally have followed a cyclical pattern that has caused energy prices to decline in the winter. A slowdown in the rate of economic growth in the United states in the spring and summer likely would lessen demand for energy imports and might help restrain the prices of energy imports. An important factor, however, will be 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, add to inflationary pressures, and have a disproportionate impact on the energyintensive 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. Some of the return in dollars likely will come through sovereign wealth funds (SWFs), or funds controlled and managed by foreign governments, as foreign exchange reserves boost the dollar holdings of such funds. Such investments likely will add to concerns about the national security implications of foreign acquisitions of U.S. firms, especially by foreign governments, and to concerns about the growing share of outstanding U.S. Treasury securities that are owned by foreigners. 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. There may well be increased pressure applied to Congress to assist in this process For Congress, the increase in the nation’s merchandise trade deficit could add to existing inflationary pressures and complicate efforts to stimulate the economy should the rate of economic growth slow down. In particular, Congress, through its direct role in making economic policy and its oversight role over the Federal Reserve, could face the dilemma of rising inflation, which generally is treated by raising interest rates to tighten credit, and a slowing rate of economic growth, which is usually addressed by lowering interest rates to stimulate investment. A sharp rise in the trade deficit may also add to pressures for Congress 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.