ȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ ’•ȱ›’ŒŽœȱ Š–Žœȱ ǯȱ ŠŒ”œ˜—ȱ ™ŽŒ’Š•’œȱ’—ȱ —Ž›—Š’˜—Š•ȱ›ŠŽȱŠ—ȱ’—Š—ŒŽȱ Š—žŠ›¢ȱŗřǰȱŘŖŖşȱ ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŝȬśŝŖŖȱ    ǯŒ›œǯ˜Ÿȱ ŘŘŘŖŚȱ ȱŽ™˜›ȱ˜›ȱ˜—›Žœœ Prepared for Members and Committees of Congress ȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ž––Š›¢ȱ Petroleum prices rose sharply in the first half of 2008, at one time reaching more than $140 per barrel of crude oil. Since July, however, petroleum prices and import volumes have fallen at a historically rapid pace; in January 2009, prices of crude oil fell below $40 per barrel. At the same time the average monthly volume of imports of energy-related petroleum products fell slightly. The sharp rise in the cost of energy imports added an estimated $50 billion to the nation’s trade deficit in 2006 and another $28 billion in 2007. The fall in the cost of energy imports combined with the drop in import volumes as a result of the slowdown in economic activity has reversed the trend of rising energy imports costs and will sharply reduce the overall costs of U.S. energy imports for the rest of 2008. 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. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ˜—Ž—œȱ Background ..................................................................................................................................... 1 Issues for Congress.......................................................................................................................... 5 ’ž›Žœȱ Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products ................................... 2 Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products ........................................ 3 Figure 3. U.S. Import Price of Crude Oil ........................................................................................ 5 Š‹•Žœȱ Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) ........................................................................................................ 1 Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted)...................................................................................................................... 3 ˜—ŠŒœȱ Author Contact Information ............................................................................................................ 6 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ȱ ŠŒ”›˜ž—ȱ According to data published by the Census Bureau of the Department of Commerce,1 the prices of petroleum products over the first half of 2008 rose sharply, generally rising considerably faster than the change in demand for those products, before falling at a historic rate. As a result, the price increases of imported energy-related petroleum products worsened the U.S. trade deficit in 2006 and 2007, and will 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 slowdown in the rate of growth in the U.S. economy is sharply reducing the amount of energy that the country imports and is helping to push down world energy prices. and, in isolation from other events, is placing upward 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, the U.S. trade deficit could be mitigated further. 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-November period of 2008, the quantity of energy-related petroleum imports fell by 5.0% compared with the comparable period in 2007; crude oil imports also fell by 3.6% from the same period in 2007. Year-over-year, the average value of energy-related petroleum products imports rose by 46%, while the average value of crude oil imports rose by 53.4%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 382 million barrels a month in the January-November period of 2008. . Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) Table 1 January through November 2007 2008 Percent Quantity Value Quantity Value change (thousands (thousands (thousands 2007 (thousands to of barrels) of dollars) of barrels) of dollars) 2008 Percent change 2007 to 2008 Total energyrelated Petroleum Products 4,425,066 $286,731,378 4,203,200 -5.0% $418,727,150 46.0% Crude oil 3,392,732 $212,543,857 3,271,302 -3.6% $326,010,401 53.4% 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 13, 2009. Table 17. The report and supporting tables are available at http://www.census.gov/foreign-trade/PressRelease/current_press_release/ftdpress.pdf. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ ŗȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ȱ January through December 2007 2008 (Actual values) (Estimated values) Percent Quantity Value Quantity Value change (thousands (thousands (thousands 2007 (thousands to of barrels) of dollars) of barrels) of dollars) 2008 Total energyrelated Petroleum Products Crude oil Source: 4,807,811 3,690,568 $318,822,423 $237,211,653 4,566,755 3,558,478 -5.0% -3.6% Percent change 2007 to 2008 $465,591,194 $363,847,101 46.0% 53.4% Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, January 13, 2009. Table 17. Estimates for January through December of 2008 were developed by CRS from data through November 2008 and data through 2007 published by the Census Bureau using a straight line extrapolation. Note: 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 July 2008 and did not follow previous trends of falling during the winter months. As Figure 2 shows, the cost of U.S. imports of energy-related petroleum products rose from about $17 billion per month in early 2007 to $53 billion a month in July 2008, but fell to $22 billion in November 2008, reflecting a drop in the price and in the volume of imported oil. The average price of imported oil in November 2008 was down 16% from the average price in November 2007, and down 47% from the average price in July 2008, reflecting the sharp decrease in the price of imported oil in August through November, as indicated in Table 2. . Quantity of U.S. Imports of Energy-Related Petroleum Products Figure 1 Millions of barrels 450 440 430 420 410 400 390 380 370 360 350 340 330 Oct Dec Feb Apr Jun Aug Oct Dec Feb. Apr Jun Aug Oct Nov Jan Mar May Jly Sep Nov Jan Mar May Jly Sep Nov 2006 2008 2007 Source: Department of Commerce ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Řȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ȱ Figure 2.Value of U.S. Imports of Energy-Related Petroleum Products Billions of dollars $52 $48 $44 $40 $36 $32 $28 $24 $20 $16 Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Nov Jan Mar May Jly S ep Nov Jan Mar May Jly S ep Nov 2006 2007 2008 Source: Department of Commerce . U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) Table 2 Period Total energy-related petroleum productsa Quantity Value (thousands (thousands of of barrels) dollars) Crude oil Quantity (thousands of barrels) 2007 Jan.- Dec. January February March April May June July August September October November December 4,807,811 419,828 334,586 418,262 404,329 427,007 414,174 406,277 414,665 391,646 404,808 389,483 382,745 $318,822,423 22,065,916 17,471,845 23,186,425 24,344,989 27,038,265 26,723,896 27,755,742 28,897,623 27,435,637 30,039,497 31,771,542 32,091,045 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ 3,690,568 321,272 256,750 318,783 305,965 322,212 321,757 310,556 317,585 302,410 315,071 300,371 297,836 Thousands Value of barrels (thousands of per day dollars) (average) 10,111 10,364 9,170 10,283 10,199 10,394 10,725 10,018 10,245 10,080 10,164 10,112 9,608 $237,211,653 16,763,529 13,001,677 16,941,702 17,514,576 19,128,841 19,623,027 20,361,977 21,647,893 20,700,725 22,869,846 23,990,094 24,667,796 Unit price (dollars) $64.28 52.18 50.64 53.15 57.24 59.37 60.99 65.57 68.16 68.45 72.59 79.87 82.82 řȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ȱ Total energy-related petroleum productsa Period Crude oil Quantity Value Quantity (thousands (thousands of (thousands of barrels) dollars) of barrels) 420,916 367,098 363,252 388,145 373,287 382,675 424,467 388,679 339,044 413,766 341,870 $35,836,371 31,356,495 33,146,123 38,185,528 40,360,232 45,207,376 52,813,717 46,012,928 36,179,838 37,632,930 21,995,613 322,206 286,483 278,571 303,050 293,995 297,532 342,024 308,380 253,276 324,185 261,600 Thousands of barrels per day (average) Value (thousands of dollars) Unit price (dollars) 2008 January February March April May June July August September October November 10,394 9,879 8,986 10,102 9,484 9,918 11,033 9,948 8,443 10,458 8,720 $27,093,581 24,281,817 25,030,666 29,339,760 31,245,288 34,850,146 42,637,563 37,000,980 27,247,205 29,830,414 17,452,979 $84.09 84.79 89.85 96.81 106.28 117.13 124.66 119.99 107.58 92.02 66.72 Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and January 13, 2009. Table 17. Energy-related petroleum products is a term used by the Census Bureau and includes crude oil, petroleum preparations, and liquefied propane and butane gas. Source: Services. a. 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-November 2008, the trade deficit in energy-related imports amounted to $364 billion, or 48% of the total U.S. trade deficit of $763 billion for the eleven-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 rose by about 10% 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 commodity prices, had increased the overall rate of inflation in the economy, such concerns have been eclipsed by the slowdown in the rate of growth in the economy.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 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, January 13, 2009. Table 17. ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Śȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ ȱ 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 June 2007 to June 2008, the average price of crude oil increased from $61 per barrel to $117 per barrel, or an increase of 92%, as shown in Figure 3. As a result, the value of U.S. crude oil imports rose from about $19 billion a month in June 2007 to $35 billion a month in June 2008. . U.S. Import Price of Crude Oil Figure 3 Dollars per barrel $125 $120 $115 $110 $105 $100 $95 $90 $85 $80 $75 $70 $65 $60 $55 $50 $45 Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Nov Jan Mar May Jly Sep Nov Jan Mar May Jly S ep Nov 2006 2007 2008 Source: Department of Commerce Data for the January-November 2008 period indicate that a number of factors combined to push oil prices to record levels in July 2008, before tumbling quickly. The sharp rise in prices combined with a small decrease in the volumes of oil imports experienced during the period combined to post a large jump in the overall cost of imported energy. At times, crude oil traded for nearly $148 per barrel in July 2008, indicating that the cost of energy imports would have a significant impact on the overall costs of U.S. imports and on the value of the U.S. trade deficit. Since those record prices, the price per barrel of imported crude oil has fallen to under $40 per barrel at times in January 2009. With an expected decrease in the volumes of energy-related petroleum products imports for the remainder of 2008 due to a slowdown in economic activity and at an average price of $90 per barrel, energy-related import prices could add about $90 billion to the trade deficit on an annual basis, pushing the annual trade deficit to nearly $900 billion. œœžŽœȱ˜›ȱ˜—›Žœœȱ 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 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ śȱ ȱ ǯǯȱ›ŠŽȱŽ’Œ’ȱŠ—ȱ‘Žȱ –™ŠŒȱ˜ȱ‘Š—’—ȱ’•ȱ›’ŒŽœȱ 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. ž‘˜›ȱ˜—ŠŒȱ —˜›–Š’˜—ȱ James K. Jackson Specialist in International Trade and Finance jjackson@crs.loc.gov, 7-7751 ˜—›Žœœ’˜—Š•ȱŽœŽŠ›Œ‘ȱŽ›Ÿ’ŒŽȱ Ŝȱ