![]() ![]() This was because Americans were unlikely to save more if the oil they purchased was produced at home rather than imported. Relying on the definition of the current account as the difference between national saving and national investment I argued that while its composition might change, the aggregate current account balance would not be affected. In my analysis, I concluded that America's overall saving and investment rates were unlikely to be affected by the move to oil self-sufficiency. However, focusing on trade in particular goods or with particular partners can miss the big picture that is required to understand the trade balance. The assumption of those who predicted that self-sufficiency would shrink the trade deficit was that US spending on other foreign goods would be unaffected if the United States produced more oil at home. I immodestly point out the accuracy of my prediction, not to claim a gift for prophecy, but rather to underscore the value of economic theory in understanding what really determines the current account. Everything else being equal, importing less oil was likely to mean more imports of other goods and services and fewer exports. I pointed out that without a change in American spending patterns, any improvement in the oil trade balance would be offset by a deterioration in other parts of the US trade balance. In a paper written for the Council on Foreign Relations, however, I argued that this view was mistaken. This outcome confirms that America's real addiction is to foreign borrowing rather than to oil! Simply put, as a nation we continuously spend more than we produce, and we borrow from the rest of world to make up the difference.Īs the effects of the fracking revolution on US production were becoming apparent, many reasoned that since net oil imports accounted for so much of the current account deficit, eliminating the deficits and achieving oil self-sufficiency would make a large contribution to reducing US net foreign borrowing. Indeed, even before COVID-19 led Americans to dramatically switch from buying services to buying goods, despite the continuous reduction of the oil and energy trade deficits after 2013, until 2019, the US current account deficit as a share of GDP remained fairly constant. Surprisingly though, as shown in figure 2, the overall US current account deficit in 2021 was actually a higher share of GDP than in 2010. By 2021 the United States had become self-sufficient in these products.Īmerica's transformation from large oil importer to a country self-sufficient in oil was remarkable. Since US consumption of petroleum products grew on average by less than 1 percent a year, the trade balance in both petroleum and energy products moved to balance in 2021. Similarly, over the same period, US production of natural gas plant liquids exploded from 2.22 mbd to 5.4 mbd. It increased from 5.67 million barrels a day (mbd) in 2011 to 11.2 mbd in 2021. However, because of fracking and other innovations, US domestic production of crude oil has soared. Bush had called America's "addiction to oil." After all, in 2011 the petroleum trade deficit amounted to 72 percent of overall US net foreign borrowing. Since the US current account deficit (the most comprehensive measure of the US trade balance in goods, services, and income) was equal to 2.9 percent of GDP at the time, it seemed fair to blame America's growing indebtedness to the rest of the world to what President George W. ![]() In 2011 the United States imported almost half of its domestic consumption of petroleum products (figure 1) and ran a trade deficit in these products equal to 2.1 percent of GDP (figure 2). The US experience with oil confirms this view. If the trade balance is viewed as a problem, the United States must either save more or invest less. Trade policy cannot reduce the trade deficit. But as economists have tried to explain for years, trade deficits result when a country spends more in total than it produces, and since the US addiction to foreign borrowing is persistent, piecemeal efforts are unlikely to reduce the US trade deficit. Common sense seems to suggest that if America stopped importing oil, or erected new barriers to imports, or encouraged more domestic production, the trade deficit would shrink. Explaining why trade deficits occur is not easy. ![]()
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