Finally, America’s trade deficit declines
America’s growing trade deficit has long been a point of frustration in U.S. trade policy. Simply put, America buys a lot more goods and services from our global trading partners than they buy from us.
In 2018, America’s trade deficit on both goods and services reached a record $627.7 billion. Our $887.4 billion trade deficit on goods was partially offset by a $259.7 billion trade surplus on services.
But last year, for the first time since 2013, America’s trade deficit declined, falling from $627.7 billion to $616.8 billion. So, what were the forces behind this sudden drop?
One of the main factors is an $87.5 billion, 16% decline in Chinese goods imported into the U.S. President Trump has long railed against America’s growing trade deficit – and the greatest contributor to that deficit is China. In 2018, China accounted for 47% of our total $887.4 billion trade deficit in goods.
Moreover, China is perhaps the greatest instigator of unfair trade practices, quotas and other restrictions it uses to restrict the flow of American goods and services into its country. In response, by the end of 2019, Trump had imposed a series of escalating tariffs on virtually every Chinese product imported into the U.S. The goal was to force U.S. consumers and businesses to buy either American-made goods or those sourced from countries outside of China.
Perhaps the more surprising factor is the continuing surge in U.S. crude oil exports. Last year, U.S. crude oil exports increased by $17.2 billion, or 35%, from 2018.
Over the past few years, America’s crude oil industry has become a global juggernaut. The benchmark grade of crude oil produced in the U.S. is West Texas Intermediate, which serves as one of three main pricing barometers of the global petroleum industry, alongside North Sea Brent and Dubai crude. Since January 2017, U.S. crude oil production has surged 48%. In late 2018, the U.S. surpassed both Russia and Saudi Arabia to become the world’s largest producer of crude oil.
U.S. crude oil production currently stands at 13.1 billion barrels per day, a record high. Production is expected to reach 13.22 million barrels per day by year-end and soar to nearly 14 million barrels per day in 2021. The International Energy Agency projects that 70% of the world’s new crude oil production in the next four years will come from the U.S.
The source behind this torrent of U.S. crude oil is the recent exploration of America’s vast shale oil fields, which contain some of the world’s largest deposits of crude oil. Combined with technological advancements in horizontal (sideways) drilling and hydraulic fracking, massive oil deposits that were once not cost-effective are now yielding crude oil in record volumes.
The benefits of America’s sudden oil independence are two-fold. First, American consumers and businesses are no longer dependent on crude oil price manipulation by OPEC (Organization of the Petroleum Exporting Countries). OPEC is a 14-nation oil cartel, led by its de facto leader Saudi Arabia, that controls roughly one-third of the world’s crude oil production. The U.S. is the largest consumer of crude oil – accounting for 20% of the world’s daily total consumption. In fact, America’s Top 3 sources of energy consumption are crude oil (36%), natural gas (31%) and coal (13%).
The second benefit is a thriving export industry. Currently, the U.S. is the world’s third largest exporter of crude oil, behind Saudi Arabia and Iraq. In 2012, America exported, on average, just 64,000 barrels per day. Today, our exports exceed 4.1 million barrels per day.
America’s recent stature as global crude oil kingpin will continue to leave its mark across our economic landscape. Not only will it help fuel our economic growth, but as evidenced in 2019, it serves as a tool to help keep America’s trade balance in check.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
