There are several reasons why today’s blog should be of great interest. Last year, the petroleum-related trade deficit totaled $265 billion and accounted for 42 percent of our total deficit in goods. To put this in more personal terms, $265 billion averages to about $850 for every woman, man and child in the U.S. In 2008, when oil prices hit their all-time high, the petroleum-related deficit totaled $386 billion (over $1,260 for each person). That’s a lot of money flowing out of the country for a commodity with a volatile price over which we have little control.
The monthly “U.S. International Trade in Goods and Services” [2] report released by the Commerce Department’s U.S. Census Bureau and Bureau of Economic Analysis presents a comprehensive measure of U.S. exports, imports and the trade deficit. The next report will be issued Thursday, March 10, and will highlight U.S. trade through January 2011. One of the more important factors that has driven changes in our imports and trade deficit over the past several decades is the price of oil. Given recent events in North Africa and the recent jumps in oil prices, today we look more closely at the role of oil prices and the trade deficit.
Because U.S. demand for oil is relatively inelastic in the short run, the recent run-up in oil prices will likely increase the amount of money flowing out of the U.S. to feed our oil habit. This, in turn, will increase the dollar amount of our petroleum-related imports and our trade deficit. However, it may be several months before this spike is revealed in the official foreign trade numbers because: 1. the lag between the rise in prices and the release of data that captures that rise; and, 2. the lag between the spot market prices of oil, quoted for future delivery, and the later delivery of oil we import.
The time series of oil prices, barrels of oil imported, and the value of those imports are shown in Figure 1. This chart shows that most of the variation in the value of oil imports arises from changes in the price of oil. The quantity of oil imported has generally trended slowly upward since the 1990s and averaged over 10 million barrels per day before the Great Recession hit. More recently, in 2010, the U.S. imported 9.3 million barrels of crude oil per day, an increase of less than 2 percent from 2009’s recession-related low.
How then does the recent rise in oil prices affect oil imports and the trade deficit in the near-term?
First of all, data released on March 10 is for January of this year, so any effects due to the recent increase in oil prices will not be seen until the April and May releases. Second, as shown in Figure 2, the unit price of a barrel of imported crude oil that is shown in the U.S. International Trade release lags one month behind the West Texas Intermediate spot market price. The average price of West Texas Intermediate crude oil rose relatively modestly from December to February, so the rise in dollars spent on oil imports likely will be less than $1 billion in the first two months of the year, absent a large move in the volume of imports. If crude oil prices stay at their early March levels, however, the amount of money spent on oil imports could add over $2 billion to monthly nominal trade deficits in April. To put this into context, total trade deficits averaged about $45 billion per month during 2010, so the increase in the trade deficit due to the increase in the price of oil is relatively significant.
~Mark Doms, Chief Economist, U.S. Department of Commerce
March 9, 2011
