U.S. Trade Deficit and the Impact of Changing Oil Prices James K. Jackson Specialist in International Trade and Finance April 13, 2012 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 between September 2010 and June 2011, at times reaching more than $112 per barrel of crude oil. Although this is still below the $140 per barrel price reached in 2008, the rising cost of energy was one factor that helped to dampen the rate of growth in the economy during the second half of 2011. While the price of oil was rising, the volume of oil imports, or the amount of oil imported, decreased slightly. Overall resistance by market demand to changes in oil prices reflects the unique nature of the demand for oil and an increase in economic activity that occurred following the worst part of the economic recession in 2009. Turmoil in the Middle East was an important factor causing petroleum prices to rise sharply in the first four months of 2011. Although prices for imported oil fluctuated somewhat throughout the year, they averaged 30% higher than in 2010 and added about $100 billion to the total U.S. trade deficit in 2011. The increase in energy import prices is pushing up the price of energy to consumers and could spur some elements of the public to pressure the 112th Congress to provide relief to households that are struggling to meet their current expenses. With oil prices rising to over $100 per barrel in early 2011, the International Energy Agency cautioned that the rising price of oil was becoming a threat to the global economic recovery. 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...................................................................................................................................... 1 Issues for Congress .......................................................................................................................... 6 Figures Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products.................................... 3 Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products ........................................ 4 Figure 3. U.S. Import Price of Crude Oil......................................................................................... 6 Tables Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) ........................................................................................................ 2 Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted)...................................................................................................................... 4 Contacts Author Contact Information............................................................................................................. 8 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 during the first two months of 2012 rose 20% over the same period in 2011 to reach an average price of $103 per barrel. In 2008, petroleum prices reached nearly $140 per barrel, before falling at a historic rate.2 After falling each month between August 2008 and February 2009, average petroleum prices reversed course and rose by 85% between February and December 2009, climbing to nearly $80 per barrel at times. In 2010, petroleum prices reached a peak average price of about $77 per barrel in April before falling to around $72 per barrel in July 2010. Average prices dropped from May to July, one of only three times average monthly petroleum prices had declined since January 2009. In December 2010, petroleum import prices averaged nearly $80 per barrel and continued to increase, reaching over $112 per barrel at times in March, April, and May 2011. Petroleum import prices then trended downward through the end of 2011, falling to an average price of $99.71 per barrel in December 2011. Oil futures contracts indicate that crude oil prices are expected to rise to about $105 per barrel by fall 2012. Turmoil in the Middle East, natural disasters, and hurricanes, however, could have a significant impact on the course of oil prices for the foreseeable future. As a result of changing petroleum prices, the price changes in imported energy-related petroleum products worsened the U.S. trade deficit in 2006-2008, and 2010-2011 and could again in 2012.3 Energy-related petroleum products is a term used by the U.S. 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. In 2009, the slowdown in the rate of growth in the U.S. economy reduced the amount of energy the country imported and helped push down world energy prices. Economic growth improved through 2010 and into the first half of 2011, driving up energy imports and energy prices. Although the pace of economic growth in the United States and Europe in the last half of 2011, petroleum prices moderated only slightly. 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, however, 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. Summary data from the Census Bureau for the change in the volume, or quantity, of energyrelated petroleum imports and the change in the price, or the value, of those imports for 2011 and estimated values for 2012 are presented in Table 1. The data indicate that during 2011, the United States imported about 4.2 billion barrels of energy-related petroleum products, valued at $421 billion. On average, energy-related imports for 2011 were down 2.7% in volume terms from the average amount in 2010 and cost an average of 30% more than similar imports during the same period in 2010. These data demonstrate that U.S. demand for oil imports is highly resistant to 1 U.S. Department of Commerce, U.S. Census Bureau, Report FT900, U.S. International Trade in Goods and Services, Table 17, April 12, 2012. The report and supporting tables are available at http://www.census.gov/foreign-trade/PressRelease/current_press_release/ftdpress.pdf. 2 For information about the causes of the run up in oil prices see Hamilton, James, Causes and Consequences of the Oil Shock of 2007-2008, Brookings Papers on Economic Activity, Spring 2009. 3 For additional information about U.S. oil imports see CRS Report R41765, U.S. Oil Imports: Context and Considerations, by Neelesh Nerurkar. Congressional Research Service 1 U.S. Trade Deficit and the Impact of Changing Oil Prices changes in oil prices. According to various studies, U.S. demand for oil is correlated more closely to U.S. per capita income than to changes in oil prices.4 Based on two-moths of data, estimates for 2012 indicate that with the average price of around $103 per barrel, U.S. imported petroleum costs could rise by about $50 billion in 2012 to reach $468 billion. Table 1. Summary Data of U.S. Imports of Energy-Related Petroleum Products, Including Oil (not seasonally adjusted) January - February 2011 2012 Quantity (millions of barrels) Value ($ billions) Quantity (millions of barrels) % change 2011 to 2012 Value ($ billions) % change 2011 to 2012 Total energyrelated petroleum products 682.6 $59.4 628.4 -7.9% $66.0 11.2% Crude oil 533.0 $45.6 496.4 -6.9% $51.5 12.8% January through December 2011 2012 (Actual values) (Estimated values) Quantity (millions of barrels) Value ($ billions) Quantity (millions of barrels) % change 2010 to 2011 Value ($ billions) % change 2010 to 2011 Total energyrelated petroleum products 4,165.0 $421.4 3,834.4 -7.9% $468.5 11.2% Crude oil 3,324.3 $331.7 3,096.0 -6.9% $374.2 12.8% Source: U.S. Department of Commerce, U.S. Census Bureau, Report FT900, U.S. International Trade in Goods and Services, Table 17, April 12, 2012. Note: Estimates for January through December 2012 were developed by CRS from data in January-February, 2012, and data through 2011 published by the Census Bureau using a straight line extrapolation. The data also indicate that in 2011, the quantity of energy-related petroleum imports fell by 2.7% compared with the comparable period in 2010; crude oil imports fell by 1.6% from the same period in 2010. Year-over-year, the average value of energy-related petroleum products imports rose by 30% in 2011, while the average value of crude oil imports rose by 31.5%. As Figure 1 shows, imports of energy-related petroleum products can vary sharply on a monthly basis. In 2011, imports of energy-related petroleum products averaged about 347 million barrels per month. 4 Hamilton, Causes and Consequences of the Oil Shock of 2007-2008; World Economic Outlook, Chapter 3, International Monetary Fund, April 2011. According to the IMF, for developed economies, a 10% increase in oil prices is estimated to result in a 0.2% decrease in oil consumption, but a 10% increase in income leads to a 6.8% increase in oil consumption. Congressional Research Service 2 U.S. Trade Deficit and the Impact of Changing Oil Prices Figure 1. Quantity of U.S. Imports of Energy-Related Petroleum Products 440 Millions of barrels 420 400 380 360 340 320 April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July Aug Sep Oct November December January February 300 2008 2009 2010 2011 2012 Source: Department of Commerce. In value terms, energy-related imports rose from a total value of $324 billion in 2010 to $421 billion in 2011, or an increase of 30%, to account for about 20% of the value of total U.S. merchandise imports. Energy prices rose sharply in 2007 and continued rising from January through July 2008, not following previous trends of falling during the winter months. 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 a month in February 2009, reflecting a drop in the price and in the volume of imported oil. The average price of imported oil in February 2012 was $103.6, up 19% from an average of $87.2 in February 2011, but down slightly from the average price per barrel of $103.8 in January 2012. As Figure 2 shows, the value of total energy imports (reflecting the change in the amount of imports and the change in the price of those imports) in February 2012 fell 16.8% from January 2012 to reach about $30.0 billion, but up about 10% from the total value of energy imports in February 2011, as indicated in Table 2. Congressional Research Service 3 U.S. Trade Deficit and the Impact of Changing Oil Prices Figure 2. Value of U.S. Imports of Energy-Related Petroleum Products $45 $40 $35 Billions of dollars $30 $25 $20 $15 $10 April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July Aug Sep Oct November December January February $5 2008 2009 2010 2011 2012 Source: Department of Commerce. As a result of the drop in the overall value of energy-related imports in 2009, the trade deficit in energy-related imports amounted to $204 billion, down by nearly half from the $386 billion recorded in 2008, and accounted for 40% of the total U.S. trade deficit of $517 billion for the year. In 2011, the rise in oil prices, year over year, combined with a slight decrease in energy imports, pushed up the overall value of energy imports, which accounted for 44% of the total merchandise trade deficit. In February 2012, the share of the U.S. trade deficit arising from energy imports was 45%, up from the 43% recorded in February 2011. Table 2. U.S. Imports of Energy-Related Petroleum Products, Including Crude Oil (not seasonally adjusted) Total energy-related petroleum productsa Period Quantity (millions of barrels) Value ($ billions) Crude oil Quantity (millions of barrels) Thousands of barrels per day (average) Value ($ billions) Unit price (dollars) 2011 Jan.-Dec. 4,165.0 421.4 3,324.3 9,108 331,698.1 99.78 Jan.-Feb. 682.6 59.4 533.0 9,035 45.6 85.63 January 375.3 32.2 290.7 9,376 24.5 84.34 February 307.3 27.2 242.4 8,656 21.1 87.17 March 371.4 35.7 295.1 9,520 27.7 93.76 April 329.2 35.0 252.2 8,408 26..0 103.18 May 350.7 38.8 275.3 8,879 29.9 108.70 Congressional Research Service 4 U.S. Trade Deficit and the Impact of Changing Oil Prices Total energy-related petroleum productsa Quantity (millions of barrels) Period Value ($ billions) Crude oil Quantity (millions of barrels) Thousands of barrels per day (average) Value ($ billions) Unit price (dollars) June 366.8 39.4 296.7 9,889 31.4 106.00 July 350.9 37.2 281.1 9,067 29.5 104.27 August 365.4 38.0 302.5 9,757 31.0 102.62 September 343.6 35.1 280.1 9,338 28.3 101.02 October 325.9 32.6 263.2 8,490 26.0 98.84 November 336.9 34.8 266.2 8,874 27.3 102.50 December 341.8 35.5 278.9 8,998 29.0 104.13 2012 Jan.-Feb. 628.4 66.0 496.4 8,274 51.5 103.73 January 344.8 36.1 270.7 8,733 28.1 103.81 February 283.7 30.0 225.7 7,783 23.4 103.63 Source: U.S. Department of Commerce, U.S. Census Bureau, Report FT900, U.S. International Trade in Goods and Services, Table 17, April 12, 2012. 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. Crude oil comprises the largest share of energy-related petroleum products imports. According to Census Bureau data,5 imports of crude oil fell from an average of 9.8 million barrels of crude oil imports per day in 2008 to an average of 9.1 million barrels per day in 2009, or a decrease of 7%. In February 2012, such imports averaged 7.8 million barrels per day, or a decrease of 10.0% from the volume of such imports recorded in February 2011, and a drop of 11% from January 2012. From January 2008 to June 2008, the average price of crude oil increased from $84 per barrel to $117 per barrel, or an increase of 39%. As a result, the value of U.S. crude oil imports rose from about $27 billion a month in January 2008 to $35 billion a month in June 2008. In 2011, crude oil imports averaged 277 million barrels per month at an average value of $27.6 billion a month. Oil import prices in 2011 rose from about $84 per barrel in January 2011 to an average of $104.1 in December 2011. As shown in Figure 3, oil import prices rose steadily between September 2010 and May 2011, fell from June 2011 to October 2011, and then rose again through December 2011. Prices have fallen slightly from in January and February 2012 compared with the prices in December 2011. 5 Report FT900, U.S. International Transactions in Goods and Services, Table 17, April 12, 2012. Congressional Research Service 5 U.S. Trade Deficit and the Impact of Changing Oil Prices Figure 3. U.S. Import Price of Crude Oil $125 $115 Dollars per barrel $105 $95 $85 $75 $65 $55 $45 April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December January February March Apr May June July Aug Sep Oct November December January February $35 2008 2009 2010 2011 2012 Source: Department of Commerce. Data for 2008 and 2009 indicate that a number of factors, primarily the economic recession, had a large impact on pushing down oil prices in the first three months. As economic growth picked up, the higher demand for oil tended to raise pressure on oil prices, which rose through the end of the year. The rise in oil prices and an increase in the volumes of oil imports during the period combined to raise the overall cost of imported energy. At times, crude oil traded for nearly $148 per barrel in July 2008, translating into higher imported energy costs that had a significant impact on the overall costs of U.S. imports and on the size 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 2009, the imported volume of energy-related petroleum products fell by 44% compared with 2008, due in large part to a slowdown in economic activity. At an average price of $56 per barrel in 2009, compared with an average price of $95 per barrel in 2008, energy-related imports fell by nearly $130 billion as a component in the overall U.S. trade deficit. For 2010, the total cost of energy imports rose to $323 billion at an average price of $75 per barrel and accounted for 41% of the annual trade deficit. In 2011, at an average price of imported energy of about $100 per barrel, the total cost of energy imports rose to $421 billion, or about $100 billion more than the cost of energy imports in 2010. Issues for Congress The rise in the prices of energy imports experienced since early 2010 through May 2011 could have a significant impact on the annual U.S. trade deficit in 2011, should those price increases stick, or run even higher. The rise in energy prices experienced during the first half of 2011 could Congressional Research Service 6 U.S. Trade Deficit and the Impact of Changing Oil Prices affect the U.S. rate of inflation and could have a slightly negative impact on the rate of economic growth in 2011. Various factors, dominated by the political turmoil in the Middle East and the rate of economic growth in Asia and other developing economies, have combined to push up the cost of energy imports, which will have a slightly negative impact on the pace of the economic recovery. The pace of economic growth, however, seems to have stalled during the second quarter of 2011, which could have an important effect on both the levels of oil imports and on the price of such imports if economic growth remains listless. Typically, energy import prices have followed a cyclical pattern as energy prices rose in the summer and declined in the winter. The slowdown in the rate of economic growth in the United States and elsewhere in 2009 sharply reduced 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 return to a positive rate of economic growth in 2010 placed upward pressure on the prices of energy imports and contributed to the nation’s merchandise trade deficit. Some of the impact of this deficit could be offset if some of the dollars that accrue abroad 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, 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. Social turmoil in the Middle East created uncertainty in the oil markets through the first half of 2011 and was a major factor in rising oil prices. The duration and intensity of the turmoil likely will continue to be the most important factor driving oil prices. As was the case in 2008, high and sustained oil prices likely will have a detrimental effect on the pace of economic growth in many parts of the world. It is possible for the economy to adjust over the long term to the higher prices of energy imports by improving its energy efficiency, finding alternative sources of energy, or searching out additional supplies of energy. Higher oil prices may well cause consumers to increase pressure on 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 reduce the government’s budget deficit and to stimulate the economy should the rate of economic growth stall. 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 slow 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 7 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 8