U.S. Trade Deficit and the Impact of Changing Oil Prices James K. Jackson Specialist in International Trade and Finance September 10, 2009 Congressional Research Service 7-5700 www.crs.gov RS22204 CRS Report for Congress Prepared for Members and Committees of Congress U.S. Trade Deficit and the Impact of Changing Oil Prices Summary 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 $28 billion to the nation’s trade deficit in 2007 and $120 billion in 2008. The fall in the cost of energy imports combined with the drop in import volumes as a result of the slowdown in economic activity reversed the trend of rising energy imports costs and sharply reduced the overall costs of U.S. energy imports for 2008 and for the first two months of 2009. Beginning in March 2009, the import price of petroleum products rose each month through July 2009, the most recent period for data. This report provides an estimate of the initial impact of the changing oil prices on the nation’s merchandise trade deficit. Congressional Research Service U.S. Trade Deficit and the Impact of Changing Oil Prices Contents Background ................................................................................................................................5 Issues for Congress ................................................................................................................... 10 Figures Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products ..................................7 Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products .......................................7 Figure 3. U.S. Import Price of Crude Oil .....................................................................................9 Tables Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) ....................................................................................................6 Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) .................................................................................................................8 Contacts Author Contact Information ...................................................................................................... 11 Congressional Research Service U.S. Trade Deficit and the Impact of Changing Oil Prices Background 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. After falling each month since August 2008, average petroleum prices reversed course and rose by 30% between February and May 2009 and reached over $70 per barrel in June 2009. As a result of changing petroleum prices, the price changes in imported energy-related petroleum products worsened the U.S. trade deficit in 2006, 2007, and 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 energyrelated imports. The slowdown in the rate of growth in the U.S. economy reduced the amount of energy the country imports and helped to push down world energy prices. As economic growth improves, energy imports will increase and energy prices are expected to rise. In isolation from other events, lower energy prices tend to aid the U.S. economy, which makes it a more attractive destination for foreign investment. Such capital inflows place 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. 1 Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, September 10, 2009. Table 17. The report and supporting tables are available at http://www.census.gov/foreign-trade/ Press-Release/current_press_release/ftdpress.pdf. Congressional Research Service 5 U.S. Trade Deficit and the Impact of Changing Oil Prices 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 2008 and for 2009. The data indicate that during the first seven months of 2009, the United States imported 2,571 million barrels of energy-related petroleum products, valued at $127 billion. Energy-related imports for this seven-month period were down 5.6% in volume terms from the same period in 2008 and cost slightly less than half the value of such imports during the same period in 2008. The data also indicate that the United States imported 4.6 billion barrels of total energy-related petroleum products in 2008, valued at $439 billion, compared with a total value of $319 billion in 2007. In 2008, the quantity of energy-related petroleum imports fell by 4.0% compared with the comparable period in 2007; crude oil imports also fell by 2.7% from the same period in 2007. Year-over-year, the average value of energy-related petroleum products imports rose by 37.6%, while the average value of crude oil imports rose by 44.2%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis, but averaged about 384 million barrels a month in 2008. Congressional Research Service 6 U.S. Trade Deficit and the Impact of Changing Oil Prices Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January through July 2008 2009 Quantity (thousands of barrels) Value ($ thousands) Quantity (thousands of barrels) % change 2008 to 2009 Value ($ thousands) % change 2008 to 2009 Total energyrelated Petroleum Products 2,723,714 $277,471,812 2,571,244 -5.6% $127,251,405 -54.1% Crude oil 2,127,663 $215,032,955 1,975,891 -7.1% $96,076,203 -55.3% January through December 2008 2009 (Actual values) (Estimated values) Quantity (thousands of barrels) Value ($ thousands) Quantity (thousands of barrels) % change 2008 to 2009 Value ($ thousands) % change 2008 to 2009 Total energyrelated Petroleum products 4,613,626 $438,745,954 4,355,361 -5.6% $201,213,373 -54.1% Crude oil 3,591,136 $341,978,528 3,334,970 -7.1% $152,795,177 -55.3% Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, September 10, 2009. Table 17. Note: Estimates for January through December 2009 were developed by CRS from data through July 2009 and data through 2008 published by the Census Bureau using a straight line extrapolation. In value terms, energy-related imports rose from $319 billion in 2007 to $439 billion in 2008, or an increase of 38%, to account for about 22% of the value of total U.S. merchandise imports. In 2008, 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 $13.6 billion in February 2009, reflecting a drop in the price and in the volume of imported oil. The average price of imported oil in July 2009 was down 50% from the average price in July 2008, reflecting the sharp decrease in the price of imported oil in August 2008 through February 2009, as indicated in Table 2. Congressional Research Service 7 U.S. Trade Deficit and the Impact of Changing Oil Prices 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 May Jly S ep Nov Jan Mar May Jly Sep Nov Jan Mar May Jly Jun Aug Oct Dec Feb. Apr Jun Aug Oct Dec Feb Apr Jun 2007 2008 2009 Source: Department of Commerce 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 $12 May Jly S ep Nov Jan Mar May Jly S ep Nov Jan Mar May Jly Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 2007 2009 2008 Source: Department of Commerce Congressional Research Service 8 U.S. Trade Deficit and the Impact of Changing Oil Prices Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) Total energy-related petroleum products Period Quantity (thousands of barrels) Value ($ thousands) Crude oil Quantity (thousands of barrels) Thousands of barrels per day (average) Value ($ thousands) Unit price (dollars) 2008 Jan.-Dec. 4,613,444 $438,686,820 3,590,628 9,810 $341,912,489 $95.22 Jan.-July 2,723,714 277,471,812 2,127,663 9,9894 215,032,955 101.07 March 363,252 33,146,123 278,571 8,986 25,030,666 89.85 April 388,145 38,185,528 303,050 10,102 29,339,760 96.81 May 373,287 40,360,232 293,995 9,484 31,245,288 106.28 June 382,675 45,207,376 297,532 9,918 34,850,146 117.13 July 424,467 52,813,717 342,024 11,033 42,637,563 124.66 August 388,679 46,012,928 308,380 9,948 37,000,980 119.99 September 339,044 36,179,838 253,276 8,443 27,247,205 107.58 October 413,766 37,632,930 324,185 10,458 29,830,414 92.02 November 341,870 21,995,613 261,600 8,720 17,452,979 66.72 December 410,426 20,018,803 319,834 10,317 15,968,127 49.93 2009 Jan.-July 2,571,244 $127,251,405 1,975,891 9,320 $96,076,203 $48.62 January 404,658 16,342,408 300,137 9,682 11,949,605 39.81 February 335,912 13,618,145 254,874 9,103 9,996,300 39.22 March 377,470 16,047,403 289,693 9,345 11,983,004 41.36 April 367,943 17,403,719 292,601 9,753 13,633,848 46.60 May 338,081 17,703,718 261,888 8,448 13,410,641 51.21 June 369,963 22,415,123 280,424 9,347 16,592,370 59.17 July 377,218 23,720,887 296,274 9,557 18,510,434 62.48 Source: Census Bureau, Department of Commerce. Report FT900, U.S. International Transactions in Goods and Services. September 10, 2009. 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 2008, the trade deficit in energy-related imports amounted to $386 billion, or 47% of the total U.S. trade deficit of $821 billion for the year. In the seven-month period of January-July 2009, the drop in oil prices, year over year, combined with reduced demand for energy imports pushed down the overall value of energy imports, which dropped to account for 38% of the total merchandise trade deficit over the seven-month period. This share is down from the same period in 2008, in which the trade deficit in energy accounted for 46% of the total U.S. merchandise trade deficit. Congressional Research Service 9 U.S. Trade Deficit and the Impact of Changing Oil Prices Crude oil comprises the largest share of energy-related petroleum products imports. According to Census Bureau data2, imports of crude oil fell from an average of 10.11 million barrels of crude oil imports per day in 2007 to an average of 9.8 million barrels per day in 2008, or a decrease of 3%. In December 2008, such imports averaged 10.3 million barrels per day, or an increase of 7.4% over the volume of such imports recorded in December 2007. 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. Figure 3. U.S. Import Price of Crude Oil Dollars per barrel $125 $120 $115 $110 $105 $100 $95 $90 $85 $80 $75 $70 $65 $60 $55 $50 $45 $40 $35 May Jly S ep Nov Jan Mar May Jly S ep Nov Jan Mar May Jly Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun 2007 2008 2009 Source: Department of Commerce Data for 2008 indicate that a number of factors combined to push oil prices to record levels in July 2008, before tumbling quickly. The sharp rise in oil prices combined with a small decrease in the volumes of oil imports experienced during the period 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 fell to under $40 per barrel at times in January and February 2009. For the year 2008, the imported volume of energy-related petroleum products fell by 4.0%, due in large part to a slowdown in economic activity. At an average price of $95 per barrel, compared with an average price of $64 per barrel in 2007, energy-related import prices added nearly $100 billion to the trade deficit on an annual basis in 2008, pushing the annual trade deficit to just over $820 billion. 2 Report FT900, U.S. International Trade in Goods and Services, September 10, 2009. Table 17. Congressional Research Service 10 U.S. Trade Deficit and the Impact of Changing Oil Prices Issues for Congress The sharp rise in prices of energy imports experienced since early 2007 through July 2008 was expected to affect the U.S. rate of inflation and have a slightly negative impact on the rate of economic growth in 2008. Various factors, dominated by the sharp slowdown in the rate of economic growth in the United States and most other areas of the world, are combining to push down the cost of energy imports. Typically, energy import prices 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 and elsewhere is reducing the demand for energy imports and caused oil prices to tumble from the heights they reached in July 2008. An important factor that often affects crude oil prices is the impact Atlantic hurricanes have on the production of crude oil in the Gulf of Mexico The drop in oil prices likely will lessen the nation’s merchandise trade deficit, although the most important factor affecting the trade deficit throughout 2009 will be the rate of growth in the U.S. economy. Over the long run, a return to a positive rate of economic growth likely will place upward pressure on the prices of energy imports that will increase the nation’s merchandise trade deficit. 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 corporate securities or acquisitions of 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. It is likely that the economy will again face high and rising prices for imported energy products as national economies recover to a more robust rate of economic growth. 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. Congressional Research Service 11 U.S. Trade Deficit and the Impact of Changing Oil Prices Author Contact Information James K. Jackson Specialist in International Trade and Finance jjackson@crs.loc.gov, 7-7751 Congressional Research Service 12