Oil Prices and the U.S. Trade Deficit

In general, market demand for oil remains highly resistant to changes in oil prices and reflects the unique nature of the demand for and the supply of energy-related imports. Deficits in U.S. petroleum trade have been equal to a large fraction of the imbalance between U.S. imports and exports. Fluctuations in U.S. energy production, turmoil in the Middle East report and uncertainty in global petroleum markets and a slowdown in the rate of growth in the Chinese economy have held down demand for energy products, despite the sharp drop in prices that typically would stimulate demand.

The combination of changes in the volume, value, and prices of crude oil can have a large impact on the total value of U.S. imports and on the composition of the U.S. trade deficit. James K. Jackson’s latest report titled U.S. Trade Deficit and the Impact of Changing Oil Prices, provides an estimate of the initial impact of the changing oil prices on the nation’s merchandise trade balance.

Crude oil comprises the largest share of energy-related petroleum products imports. Imported petroleum prices fell from an average price of $91.23 per barrel of crude oil in 2014 to an average price of $47.28 per barrel in 2015, or a drop of 48%. This represents the lowest price per barrel of crude oil since early 2009, when the global economy was slowing sharply. According to data published by the U.S. Department of Commerce, the average price of imported petroleum products averaged $47.428 per barrel in 2015, or a drop of 48% from the previous year.

Oil futures markets in August 2016 indicate that oil traders expected crude oil prices to trend above the average of $47 per barrel through the end of 2016 to a range of $47-$49 per barrel. The data indicate that during 2015, the United States imported about 3.4 billion barrels of energy-related petroleum products, valued at $170 billion, down 46% from $317 billion in 2014. Most importantly, the average price per barrel of crude oil in 2015 was $47 per barrel, down 48% from the average price of $91 per barrel in 2014. Based on data for 2015 and the first half of 2016, imports of petroleum products and imports of crude oil in 2016 are projected to total about $111 billion dollars and $83 billion, respectively, down 34% from the comparable values in 2015.

By June 2016, energy imports had dropped to account for 8% of the total U.S. trade deficit, which stands at the lowest monthly share in over a decade. The U.S. overall trade deficit, however, rose in 2015 compared with that recorded in 2014 due to a rise in imports of non-petroleum products. In December 2015, imports of energy- related petroleum products averaged about 309 million barrels per month, down slightly from the average of 311 million barrels per month in December 2014. In the first half of 2016, imports of petroleum products, at 294 million barrels a month, were averaging 6.2% above the comparable period in 2015 and imports of crude oil, at 239 million barrels a month, were averaging 5.0% above the same period in 2015. At 314 millions of barrels and 244 million barrels, imports of energy products and of crude oil, respectively, in June 2016 reached their highest levels since 2013.

The average price of imported oil in 2015 was $47.26, down 46% from an average price of $91.23 in 2014. In December 2015, the average price of imported oil stood at $36.60 per barrel, the lowest average monthly value recorded since July 2004. By June 2016, the average price of an imported barrel of oil had risen to $39.38, reversing the side in oil prices over the previous year. The price of crude oil, rose by about two and a half times between 1990 and 2015. As a result, the total value of U.S. crude oil imports, rose by about three times between 1990 and 2015.

Given oil’s strong characteristic as a vital commodity, demand, particularly in the short term, is inelastic versus price. This is why, when oil prices rise, the value of oil imports by importing nations will increase at about the same rate as the rise in price. As the price of energy-related imports has dropped, the amount of oil imports also has declined. The United States has become the world’s largest combined producer of oil and natural gas, which reduces the need for oil imports. The fall in the prices of energy imports in 2014 and 2015, combined with a decrease in the total volume of energy imports, resulted in a smaller contribution to the overall U.S. trade deficit in 2014 and 2015.

This trend continued through the first five months of 2016, lowering the contribution of energy imports to the overall U.S. trade deficit. While the energy component of the U.S. trade deficit has fallen appreciably, the overall U.S. trade deficit has not. 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