Jeremey Peters' New York Times article on the trade deficit says that there is no sign that the US demand for oil imports is slowing. The evidence: oil imports, in millions of barrels per day, are as high as they have been since October.
I disagree. The evidence that higher prices are restraining demand for imported oil – both by encouraging marginal supply in the US to come on line and reducing US demand – is pretty good. I like looking at the import volume series reported in exhibit 17 of the trade report. Those volumes grew by 7.3% in 2003 (v 2002), 5.7% in 2004, 1.7% in 2005 and are down 2% so far this year (v. the first five months of 2005).
Up until the recent surge in oil prices, oil imports were growing faster than overall US demand for oil. Not anymore.
I am not sure if this is more a demand response (less US demand for oil) or more a supply response (more domestic US production), but it seems like pretty clear evidence to me. My forecasts for the 2006 trade deficit now incorporate a baseline without any increase in demand for imported oil. I probably should work in a small fall.
Incidentally, Chinese demand for oil is up 15% y/y. Probably because new car sales have been growing like mad. It probably isn’t an accident that in the face of growing Chinese demand and limited growth in supply, higher prices have helped to push US demand down. That’s how markets work. They match demand and supply.
I also wanted to build on a couple of points that I made yesterday -- points that put me outside the emerging consensus (see the various investment bank daily comments) that the non-oil trade deficit may have peaked. My worry: folks are extrapolating on the basis of recent trends on the non-oil import and export side that may not be sustained.
The following chart shows US non-oil imports. They basically have been flat since January. Interestingly, they also were flat in the first half of last year, then grew strongly in the second half. That supposedly was linked to a correction in electronics inventories, among other things.
I wouldn’t be surprised is something similar happens this year. Or at least I cannot rule it out. US import demand slowed before the US economy slowed in 2006. And it might pick up (slightly) even as the US economy slows. 12 months of zero growth in non-oil imports would be unusual – so long as overall demand growth remains positive.
And what of exports? I put them on a separate graph, because the difference in scale is such that the upward trend gets squashed a bit if exports are graphed on the same scale as non-oil imports. The scale for imports is $120b to $155b. The scale for exports is $90b to $120b.
There is a solid upward trend. I was slightly worried that export growth was flattening on the basis of the January to April data. But there was a nice jump up in May.
What accounts for very strong export growth since the end of 2003?
- The dollar’s depreciation against the euro in 2002 and 2003. The euro ended 2003 at 1.25 – and has generally fluctuated around that level since. That helps.
- Strong world growth.
- Strong growth in global demand for civil aircraft – combined with a recent run of success at Boeing. Indeed, civil aircraft is one area where global demand growth has been stronger than US demand growth. US airlines haven’t been placing big orders. Airlines in Asia and the Middle East have. Boeing competes against a European firm, so it benefits strongly from dollar depreciation. I don’t think it is an accident that airbus did quite well when the dollar/ euro was around 0.9, and Boeing is doing quite well with the dollar/ euro at 1.25 and change.
I still think there is a risk that the month over month growth in exports may slow over the course of the year. Or exports may fall below the trend line. Why?
- May may prove to be blip. The January-April flattening may be telling up something.
- A set of emerging economies with large and growing current account deficit financed by big capital inflows (Turkey, India) ran into a bit of trouble recently. I expect that Turkey’s economy will slow and its current account deficit (particularly excluding oil) will start to shrink. And India’s deficit may not expand at its current pace. Same with South Africa.
- Generally speaking, the emerging economies that don’t export oil may have to cut back on non-oil imports to pay their oil import bill. Borrowing may not be as easy as it was in the first half. And the oil exporters generally speaking don't buy American.
And Boeing. With some help from Mr. Bill, I learned it shipped 195 planes in the first half of the year. It expects to ship 200 in the second half. That is more than in 2005. But it doesn’t seem to provide the basis for a lot of growth over the first half of this year. Boeing seems to producing at capacity.
The big wildcard -- two net oil exporters on the United States border. Canada and Mexico. Both do buy American. Continued strong demand from Mexico and Canada could help.