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US Economy – Trade Deficit
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US Economy – Trade DeficitRising oil prices are rapidly exacerbating the trade deficit James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08 http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204 As a result of the overall rise in the value of energy-related imports in 2007, the trade deficit of such imports rose to $293 billion to account for 36% of the total $815 billion U.S. trade deficit, up from one-fifth of the total trade deficit in less than two years. In January-April 2008, the trade deficit in energy-related imports amounted to $132 billion, or 47% of the total U.S. trade deficit of $284 billion for the four-month period. Elevated energy prices drastically increase the trade deficit James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08 http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204 Data for the January-April 2008 period indicate that a number of factors combined to push oil prices to record levels.. The sharp rise in prices combined with a small decrease in the volumes of oil imports experienced in April combined to post a large jump in the overall cost of imported energy. At times, crude oil traded for nearly $140 per barrel in June 2008, indicating that the cost of energy imports will have a significant impact on the overall costs of U.S. imports and on the value of the U.S. trade deficit. With current expected volumes of energy-related petroleum products imports and at an average price of $110 per barrel, energy-related import prices could add nearly $200 billion to the trade deficit on an annual basis, pushing the annual trade deficit to over $1 trillion. With current expected volumes of energy-related petroleum products imports and at an average price of $120 per barrel, energy-related import prices could add $240 billion to the annual trade deficit. Similarly, at a price of $140 per barrel, energy-related import prices could add more than $320 billion to the annual trade deficit. US Economy – InflationHigh oil prices intensify inflationary pressures James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08 http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204 The quantity of energy imports in 2007 fell by 1.5% below the quantity imported in 2006, but the total price of U.S. energy imports rose by about $28 billion in 2007 above that for 2006, largely as a result of the continued rise in the prices of imported energy in the October-December period of 2007. In testimony before Congress, Federal Reserve Board Chairman Ben Bernanke indicated that the rise in oil prices, along with other commodity prices, likely would increase the overall rate of inflation in the economy, an important consideration in policy-making by the Federal Reserve.2 High inflation forces credit liquidation and risks wars that cause extinction Norman A. Bailey, Former Senior Director of International economic Affairs under President Reagan, 1990 The World Economy in the 1990s, The World and I, Page 31 The question is not whether human life will be transformed-it will be. Nor is it whether that transformation will be good or evil-it will be both, as it always is. The question, how will we get there: Will we mindlessly follow the historical pattern of a violent collapse of the inflationary credit pyramid build up over the past thirty years, condemning an entire generation to the miseries, uncertainties, and dangers of another Great Depression? Or will we find the collective will and wisdom to manage our affairs well enough to avoid a repetition of that terrible time? The thirties, after all, began three months after the inception of the Great Depression and ended four months after start of World War II. This was not a coincidence. Tens of millions were killed and maimed in the Second World War. If another historical credit-liquidation cycle is allowed to take place in the usual chaotic fashion, the chances of another global armed conflict will be greatly increased-this time, not only would hundreds of millions (rather than tens of millions) be killed or wounded, but the very hopes and the future of [hu]mankind, as such, might well be destroyed in the process. Rising nominal oil prices trigger wage-price inflation Hillard G. Huntington, Director Energy Modeling Forum Stanford University, 10-3-05 http://www.stanford.edu/group/EMF/publications/doc/EMFSR9.pdf, The Economic Consequences of Higher Crude Oil Prices, Final Report, EMF SR 9 When oil price changes are gradual and the economy is not operating close to its natural output level, these events may produce reductions in aggregate demand that push the economy below its potential output level. As a result, unemployment and excess capacity increase in the short run before wage and price can adjust to new equilibrium levels, causing these adverse impacts to fade in the long run. The key exogenous variable in any oil shock analysis based upon a macroeconomic model is the nominal price for oil imports. Higher nominal prices increase the aggregate prices for all goods and services and reduce aggregate spending. As the costs of other goods and services rise, the real oil import price begins to decline. This variable, the real oil price level, is therefore partially an output of the macroeconomic simulation. If policy favors augmenting output rather than curbing inflation, the economy will have higher output but lower real oil prices. If policy favors curbing inflation rather than unemployment, the economy will have lower output but higher real oil prices. Since real oil prices are both partly endogenous and subject to policy choices, most macroeconomic simulations do not try to hold real oil import prices constant at a given post-shock level. US Economy – Wage-Price InflationMounting oil prices set off wage-price spirals Hillard G. Huntington, Director Energy Modeling Forum Stanford University, 10-3-05 http://www.stanford.edu/group/EMF/publications/doc/EMFSR9.pdf, The Economic Consequences of Higher Crude Oil Prices, Final Report, EMF SR 9 Nominal rather than real oil prices play a critical role in the aggregate demand responses in most macroeconomic models. In the neo-Keynesian framework, many important macroeconomic frictions prevent rapid changes in nominal prices for final goods (due to the costs of changing “menu” prices) or for key inputs (e.g., wages). Moreover, nominal price stickiness is asymmetric in that firms, unions and other organizations are much more reluctant to accept reductions in their purchasing power through lower prices than increases in income through higher prices. When a nominal oil price shock threatens this purchasing power by creating pressures for lower nominal prices for final products and non-energy inputs, the adjustment process is slowed with multiplying effects throughout the economy. These frictions can feed upon each other, as in an economy already experiencing prior inflationary pressures, causing wage-price spirals, as occurred in the 1970s. When these price increases affect wages and other prices in this way, economists often refer to the oil price increase as influencing the “core” inflation rate (probably only temporarily). US Economy – Inflation + GrowthSoaring oil prices increase inflation and cripple economic growth in the US James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08 http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204 The sharp rise in prices of energy imports experienced since early 2007 is expected to affect the U.S. rate of inflation, likely will have a slightly negative impact on the rate of economic growth in 2008, and pose a number of policy issues for Congress. Various factors are combining to push up the cost of energy imports to record levels at a time when they traditionally have followed a cyclical pattern that has caused energy prices to decline in the winter. A slowdown in the rate of economic growth in the United states in the spring and summer likely would lessen demand for energy imports and might help restrain the prices of energy imports. An important factor, however, will be the impact Atlantic hurricanes have on the production of crude oil in the Gulf of Mexico Most immediately, higher prices for energy imports will worsen the nation’s merchandise trade deficit, add to inflationary pressures, and have a disproportionate impact on the energy intensive sectors of the economy and on households on fixed incomes. High oil prices slow down growth and increase inflation – stimulus isn’t enough James K. Jackson, Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division, 6-10-08 http://italy.usembassy.gov/pdf/other/RS22204.pdf, U.S. Trade Deficit and the Impact of Rising Oil Prices, Congressional Research Service Report for Congress RS22204 For Congress, the increase in the nation’s merchandise trade deficit could add to existing inflationary pressures and complicate efforts to stimulate the economy should the rate of economic growth slow down. In particular, Congress, through its direct role in making economic policy and its oversight role over the Federal Reserve, could face the dilemma of rising inflation, which generally is treated by raising interest rates to tighten credit, and a slowing rate of economic growth, which is usually addressed by lowering interest rates to stimulate investment. A sharp rise in the trade deficit may also add to pressures for Congress to examine the causes of the deficit and to address the underlying factors that are generating that deficit. In addition, the rise in prices of energy imports could add to concerns about the nation’s reliance on foreign supplies for energy imports and add impetus to examining the nation’s energy strategy. 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