RIS­ING OIL PRICES GIVE NEW BOOST TO US ECON­OMY

The Gulf Today - Business - - FRONT PAGE -

US net pe­tro­leum im­ports have fallen to the low­est level in more than half a cen­tury as a re­sult of the shale revo­lu­tion, which is pro­foundly chang­ing the im­pact higher oil prices have on the econ­omy.

Since the 1860s, the United States has been the world’s largest pro­ducer and con­sumer of oil, which means it has a com­pli­cated re­la­tion­ship with oil prices.

Ris­ing oil prices ben­e­fit some busi­nesses and work­ers at the ex­pense of oth­ers, and the same has been true about a sharp price fall.

Un­til af­ter World War Two, the coun­try was a net ex­porter to the rest of the world, the first era of US en­ergy dom­i­nance.

But from the late 1940s and es­pe­cially the 1950s, the United States turned into an in­creas­ingly ma­jor oil im­porter.

Since then, the prin­ci­pal ef­fect of a rise in oil prices has been to trans­fer in­come from con­sumers and busi­nesses in the United States to oil-pro­duc­ing coun­tries in Latin Amer­ica, the Mid­dle East and Africa.

Ris­ing prices have put pres­sure on the US bal­ance of pay­ments and the dollar’s value, con­tribut­ing to an oc­ca­sion­ally neg­a­tive re­la­tion­ship be­tween the price of oil and the ex­change rate.

But as net im­ports have de­clined in the last decade, the pic­ture has changed again, and the main trans­fers of in­come are now oc­cur­ring within the United States rather than with the rest of the world.

The im­pact of oil prices on the US trade deficit and the ex­change rate is be­com­ing much less sig­nif­i­cant than be­fore.

In­stead, ris­ing prices are trans­fer­ring in­come from net con­sum­ing states such as Cal­i­for­nia, Florida, New York and Illi­nois to net pro­duc­ing states in­clud­ing Texas, Ok­la­homa, New Mexico and North Dakota.

Ris­ing prices are also trans­fer­ring in­come from house­holds, mo­torists, the trans­porta­tion sec­tor, man­u­fac­tur­ers and re­tail­ers to the oil in­dus­try and its sup­ply chain.

In the broad­est sense, ris­ing oil prices tend to de­press spend­ing by con­sumers while en­hanc­ing in­vest­ment by the oil in­dus­try (“How ris­ing oil prices will af­fect the United States”, Bar­ron’s, May 11).

In the short term, ris­ing oil prices have pro­vided a sig­nif­i­cant boost to the eco­nomic ex­pan­sion as the pos­i­tive im­pact on in­vest­ment has out­weighed the neg­a­tive im­pact on con­sumer spend­ing.

But that pos­i­tive sce­nario may not last if oil prices con­tinue to rise over the next two years.

TRADE BAL­ANCE

Do­mes­tic crude pro­duc­tion has more than dou­bled from an average of 5 mil­lion barrels per day (bpd) in 2008 to 10.3 mil­lion bpd in Fe­bru­ary 2018.

Government poli­cies have also cut im­port depen­dence by re­quir­ing in­creases in ve­hi­cle fuel econ­omy and man­dat­ing the ad­di­tion of ethanol and biodiesel to the fuel sup­ply.

Do­mes­tic con­sump­tion of pe­tro­leum prod­ucts peaked at 20.8 mil­lion bpd in 2005 and was av­er­ag­ing 19.9 mil­lion bpd in 2017.

The re­sult has been a trans­for­ma­tion in US pe­tro­leum trade, with the coun­try be­com­ing an in­creas­ingly im­por­tant ex­porter of re­fined prod­ucts, such as diesel, and more re­cently crude oil.

The size and sud­den­ness of this shift is one rea­son why the rise of shale pro­duc­tion in the United States qual­i­fies as a gen­uine en­ergy revo­lu­tion. Net im­ports of crude oil and pe­tro­leum prod­ucts peaked at more than 12.5 mil­lion bpd in 2005, ac­cord­ing to the US En­ergy In­for­ma­tion Ad­min­is­tra­tion.

By 2017, net im­ports had fallen to 3.7 mil­lion bpd and they con­tin­ued to shrink in the first three months of 2018.

The United States re­mains an im­por­tant net im­porter of crude (roughly 6 mil­lion bpd in re­cent months) but has be­come an im­por­tant net ex­porter of re­fined prod­ucts (3 mil­lion bpd).

The bal­ance of pay­ments is now much more insulated from the im­pact of chang­ing oil prices than dur­ing the 2008 oil shock.

Be­tween Jan­u­ary and March 2018, the US trade deficit with the rest of the world wors­ened by al­most $23 bil­lion com­pared with a year ear­lier.

The non-pe­tro­leum com­po­nents of the deficit wors­ened by $26 bil­lion but the pe­tro­leum deficit ac­tu­ally im­proved by al­most $4 bil­lion.

EN­ERGY DOM­I­NANCE

The rise in US oil pro­duc­tion has en­cour­aged some pol­i­cy­mak­ers to speak about achiev­ing en­ergy in­de­pen­dence or even a sec­ond era of en­ergy dom­i­nance.

The re­al­ity is more com­pli­cated. In­creased do­mes­tic en­ergy pro­duc­tion is clearly ben­e­fi­cial for the econ­omy.

But sharp in­creases or re­duc­tions in oil prices can still have pro­found dis­tri­bu­tional ef­fects within the United States.

Since cap­i­tal and labour do not move with­out fric­tion be­tween in­dus­tries and states, sud­den in­come re­dis­tri­bu­tion can still have an ad­verse im­pact on the over­all per­for­mance of the econ­omy.

The oil slump be­tween 2014 and 2016 deep­ened the over­all slow­down in busi­ness in­vest­ment and con­trib­uted to a soft patch in over­all eco­nomic growth, which ini­tially over­shad­owed the gains for con­sumers.

The rise in prices since 2016 is now con­tribut­ing to an ac­cel­er­a­tion of busi­ness in­vest­ment and ac­tiv­ity in the oil and gas sec­tor and all along the sup­ply chain, help­ing boost the over­all eco­nomic ex­pan­sion.

Min­ing, which in­cludes oil and gas pro­duc­tion, was the fastest­grow­ing sec­tor of the US econ­omy in 2017.

Ris­ing oil prices are one rea­son the economies of some ma­jor oil­pro­duc­ing states out­per­formed the rest of the coun­try towards the end of 2017.

Texas was the fastest-grow­ing state econ­omy in the coun­try in the fi­nal three months of 2017 (“Gross do­mes­tic prod­uct by state: fourth quar­ter and an­nual 2017”, Bureau of Eco­nomic Anal­y­sis, May 2018).

But beyond a cer­tain point, ris­ing oil prices will start to weigh on in­vest­ment and spend­ing by the non-oil sec­tor and house­holds, re­tard­ing over­all growth.

More­over, the United States re­mains em­bed­ded in a dense web of in­ter­na­tional trad­ing re­la­tion­ships with pe­tro­leum pro­duc­ing and con­sum­ing coun­tries.

Higher oil prices tend to im­prove the op­por­tu­ni­ties for US ex­ports and out­ward in­vest­ment in pe­tro­leum-ex­port­ing coun­tries in the Mid­dle East and other re­gions.

But they also tend to curb ex­port growth to pe­tro­leum-im­port­ing coun­tries, no­tably China, In­dia, Ja­pan and in Europe, which in­clude some of the coun­try’s most im­por­tant trad­ing part­ners.

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