On Friday, the US trade deficit shrunk by far more than expected, in large part thanks to declining oil imports.
The oil and gas picture is improving. The trade deficit for petroleum-based goods alone shrank from $326 billion in 2011 to about $291 billion last year. That’s still a big deficit, but oil imports fell by about $24 billion. Meanwhile, petroleum-related exports rose by more than $10 billion. According to analysis of the data by IHS Global Insight, an international consulting group, oil imports in December hit their lowest level since December 1999.
The decreasing need for oil from abroad is basically a result of two secular trends.
One is that the US is producing more oil.
Photo: Mark Perry, AEI
The other factor is that domestic driving is on a secular downturn.
Both of these trends seem likely to continue.
That has profound implications, both in terms of financial markets and geopolitics.
SocGen’s Sebastien Galy explains how we’re entering a “strange world” where the dollar is bound to strengthen. And the US global military footprint is bound to shrink (due to lower resource demand).
In 1979, snow reached the second floor in Washington DC, in 1998 the electrical grid of Quebec physically collapsed, yesterday a few inches of snow in NY made headlines worldwide. Much as snow, it is the steady accumulation that matters for the trade balance and the USD. This global imbalance has risen to the size of an elephant as the rest of the world grew more from exporting to the US. In Pratchett’s imagery, the elephant has been riding on four increasingly restive turtles and holding the weight of the world on its shoulders. This elephant is on a diet.
The US trade balance shows rising evidence that the US is moving towards energy independence, changing fundamentally the path of the US current account balance and the Fed’s ability to weaken the USD. Add to this the steady risk of tighter fiscal policy (sequestration debate) which would reduce the need for external funding and pressure on corporates to hand over their cash stored mainly in EM and we are in a strange world where the USD is doing better in a risk rally.
The US trade balance was notable by the lower demand for energy. As this vulnerability diminishes, it has economic and strategic implications. Strategic implications suggest a lighter US footprint globally and hence more political risks abroad as some have noted. Economic implications vary from the lower need to hedge oil imports which strengthens the USD to an improved balance sheet for the US. The Fed’s ability to weaken the usd is reduced as the back end of the UST curve will be in limited demand from foreigners, if they continue to expect an eventual normalization of Fed policy. A higher yield reduces the need to divest out of the USD, reducing an accelerator of usd weakness.
If the sequester (the cuts to military spending) go through, people will look back and find it interesting that Washington grew willing to make cuts just as people started to talk about declining US oil imports.