March data on U.S. International Trade in Goods and Services will be released tomorrow, Wed., May 11. One thing to keep in mind when looking at the March international trade figures is the role petroleum plays in month-to-month (as well as quarter-to-quarter and year-to-year) changes in the U.S. trade deficit. In February, according to the latest figures available from the Census Bureau, the trade deficit in petroleum products totaled $25.8 billion in petroleum products, which accounted for a whopping 43% of our overall trade deficit (yes, these two numbers alone should be reason enough to actively reduce our dependence on foreign oil and invest in a 21st century clean energy economy, as the President has advocated).   We won’t hazard a guess as to what the March data will show, but it is well known that the price of oil and the trade deficit in petroleum-related products are closely linked, as shown in Figure 1 below. 

One reason that these two factors closely correlate is because our country’s demand for oil is fairly inelastic (that is, our demand for barrels of oil only diminishes a little bit when prices shoot up).  But on a month-to-month basis, however, the amount of our oil imports can fluctuate.  So although the price of oil might increase, that doesn’t necessarily mean that our deficit will also increase.  In the case that inventories are particuarly high one month, we may import less the following month.  For example, in February, our petroleum-related deficit shrank, but the price of oil also increased.

The price of oil can be a complicating factor.  The price we often hear in the news is for the “spot price” of oil, but not all oil is bought in the "spot" market.  (The "spot price" is the selling price of a commodity for immedate rather than future delivery.)  When computing the trade numbers, Census examines what the average prices were for all of our oil imports and exports.  Statistically speaking, the spot price today helps forecast what the average delivery price will be a month from now.  Tomorrow we’ll find out what the data hold for March. 

~Mark Doms, Chief Economist, U.S. Department of Commerce

May 10, 2011