Tuesday, February 28, 2012
Oil Imports, Trade Deficits, and the US International Investment Position -- II
The consequence of importing oil at a rate of a billion dollars a day is that the net foreign investment position of the United States is steadily eroding.
REVISED February, 2012. My original article was posted January 2011.
This revision adds improved charts and data.
The US annual trade deficit has been growing since 1980, reaching about $750 billion a year in 2006. The annual trade deficit diminished sharply in the 2009 recession to about $380 billion a year. It's interesting to note that at a billion dollars a day, oil imports accounted essentially for the entire trade deficit during the recession.
Let’s begin with a look at the volumes and costs of oil imports. The United States began importing significant volumes of oil in the 1950s, and sharply increased imports about 1973. Volumes of imported oil are sensitive to price. The volume of imported oil declined due to high prices in the early 1980s, and volumes increase again following the price decline in 1986.
The volume of imported oil exceeded the volume of domestic production in 1989. Imports peaked in 2006 at 14 million barrels per day (MMBPD). Imports have since declined to 11 MMBPD due to recession, increased price, and a 0.5 MMBPD increase in domestic production.
Prices have increased dramatically in recent years, rising from an average price of about $20/barrel through the 1990s, to a current price of $125 per barrel (Brent). Future prices are likely to be volatile, given political instability in the Middle East, and the reasonable prospect of peak oil, offset by potential new technologies and the large potential for efficiency and conservation in oil-intensive economies (see Winning the Oil Endgame, Amory Lovins).
Given the recent increase in the price of oil, the cost of imports to the US economy has increased from roughly 10 $ billion per month (2000 – 2004) to over 40 $ billion per month today, at yesterday’s Brent price of $127 per barrel.
The U.S. Net International Investment Position represents the cumulative influence of the balance of trade, receipts and payments of income, investment performance and transfer payments and transactions. The net investment position of the United States turned negative in 1986, and it currently about 2.5 $ trillion, or about 20% of annual GDP.
By comparison, the cumulative cost of imported oil since 1981 probably passed 4 $trillion dollars last year. The cost of imported oil in recent years is an ever-increasing negative slope, paralleling the negative trend of our international investment position.
Alternatively, we could focus on the cost of importing consumer electronics, textiles, cars, metals or other imports. But the cost of imported oil is clearly one of persistent reasons for the loss of American wealth and damage to the American economy.