Publisher Council on Foreign Relations Press
Release Date January 2014
The United States ran historically large trade deficits during the 2000s and accumulated large debts to both official and private foreign lenders. This development has raised doubts in many quarters about the United States' ability to play its leading role in the global financial system and concerns about the burdens of U.S. international indebtedness for future generations.
Deficits in U.S. petroleum trade have been equal to a large fraction of the imbalance between U.S. imports and exports. Yet as of early 2014, U.S. oil trade deficits were projected to decline considerably, leading to claims that the overall trade deficit will decline sharply too.
In this Energy Report, Robert Lawrence argues that, though falling imports could have significant short-term effects, any improvement in the oil trade balance is likely to be offset in the long run by deterioration in other parts of the U.S. trade balance. Using a mix of theoretical analysis and empirical evidence, Lawrence argues that, in the long run, the United States will need to turn to other levers to substantially reduce its international borrowing and bring its trade into balance.
The United States has recently run historically large trade deficits. Between 2000 and 2012, the cumulative total of U.S. spending on imports of goods and services exceeded U.S. export earnings by $7.1 trillion dollars. Although Americans have also enjoyed capital gains on their foreign assets, they have nonetheless accumulated large debts to both official and private foreign lenders. This development has raised doubts in many quarters about the United States' ability to play its leading role in the global financial system and concerns about the burdens of U.S. international indebtedness for future generations.
Deficits in U.S. petroleum trade have been equal to a large fraction of the imbalance between U.S. imports and exports. Between 2000 and 2012, the cumulative total of U.S. trade deficits in crude oil and refined petroleum products amounted to $2.87 trillion, 40.5 percent of the cumulative deficits in all goods and services over the period.1 And oil's role has increased in importance over the time: in 2012, for example, the trade deficit in oil was equal to 55 percent of the overall trade deficit in goods and services.
Yet U.S. oil trade deficits are likely to decline considerably. Remarkably, the possibility of the United States actually eliminating net oil imports can no longer be dismissed. (The latest long-term Annual Energy Outlook of the U.S. Energy Information Administration [EIA] includes a scenario with zero net U.S. imports.2) Stimulated by high prices and technological developments, domestic oil production is expected to grow. Domestic demand, meanwhile, will grow modestly or even decline because of increased conservation spurred by tougher fuel-economy standards, high oil prices, and the substitution of other sources of energy for oil.
Given the significant role oil has historically played in U.S. trade deficits, many observers are predicting that a strong move toward oil self-sufficiency will lead to large declines in the overall U.S. trade deficit.3 Indeed, holding everything else constant, eliminating a large negative entry for oil in the balance of payments accounts would lead to smaller totals for the trade deficit. Similarly, cheaper U.S. energy (notably natural gas) could make some types of U.S. manufacturing more competitive, cutting manufactured imports and boosting manufactured exports. But the premise that other things will remain constant is invalid.
Table 1. Findings
Absent other changes in the economy, I show in this paper that a decline in net imports of oil and energy-intensive manufactured goods is likely to be offset by greater net imports in other goods and services. In the long run, the changes in oil and non-oil trade balances could well cancel each other, leading to little or no change in the overall U.S. trade deficit. In the short run, though, the conventional wisdom could have greater validity, since the offsetting effects are likely to be smaller, leading to a decline in the overall U.S. trade deficit. Moreover, as U.S. oil imports fall, sudden changes in the price of oil are likely to have less of an effect on the U.S. trade deficit than they have had historically, making the U.S. trade deficit less volatile. Ultimately, though rising U.S. oil production will yield broader economic gains, its benefits for the long-term U.S. trade deficit have been overstated.
This implies that the economic concerns about growing U.S. international indebtedness, and the geopolitical concerns about the U.S. dependence on borrowing from countries like China, will not automatically be alleviated by oil self-sufficiency.
1. U.S. Bureau of Economic Analysis, Table 2a Trade in U.S. Goods, U.S. Department of Commerce. Accessible at http://www.bea.gov/iTable/iTable.cfm?reqid=6&step=3&isuri=1&600=3#reqid=6&step=3&isuri=1&600=3.
2. See U.S. Energy Information Administration, Annual Energy Outlook 2013, DOE/EIA00383 (Washington, DC: Department of Energy, April 2013).
3. See, for example, Edward L. Morse, Eric G. Lee, Daniel P. Ahn, Aakash Doshi, Seth M. Kleinman, and Anthony Yuen, Energy 2020: North America, the New Middle East?, Citi GPS: Global Perspectives & Solutions, March 20, 2012.