On Wednesday I noted that encouraging more U.S. oil production was unlikely to result in a significant drop in U.S. retail gasoline prices. Nevertheless, I believe that there would be some important economic benefits from lowering the U.S. oil import bill, as I discuss here.
In 2011, the U.S. imported $462 billion of petroleum and petroleum products, or more than a billion dollars every day (see BEA Table 4.2.5). The fact that we import goods from other countries is not a problem per se. Standard economic theory teaches that if the U.S. imports some goods and exports others, the country overall will be richer than in the absence of trade, because the value of what we gain in imports is higher to us than the value of what we sell as exports. But in the current U.S. situation, our oil imports aren’t balanced by other exports. Last year the U.S. spent $568 billion more on imported goods and services than we sold to other countries, with petroleum imports accounting for more than 80% of the total current account deficit
When we import more than we export, we have to pay for the difference either by selling off some of our assets or by borrowing more from foreigners. Notwithstanding, running a current account deficit could still be a way to make the country richer. If we use the imported goods and borrowed funds to invest in productive capital and useful infrastructure, we should have plenty of future resources to pay back all that we borrowed, with more left over for ourselves. In such a case, a big current account deficit could still be a win-win situation.
But what if we’re not investing, and are just using the imports and foreign borrowing to enjoy a temporarily higher standard of living, leaving it to the future to pay the bills? That, too, could be economically optimal if what we most value as a nation is having more consumption spending right now.
But I’m not convinced that’s the future that most Americans want.
One can express the magnitude of historical U.S. oil imports in current dollar terms by supposing that each dollar of imported oil since 1973 had ultimately been paid for by selling U.S. Treasury debt to the oil exporters. I took the dollar value of oil imports each year since 1973 and calculated the value if that sum had been invested in Treasury securities which were rolled over up to the present day. That calculation leads to a cumulative wealth transfer since 1973 from the U.S. to oil-producing countries of some $10.3 trillion when valued in 2011 dollars. That comes to almost $33,000 from every person in America or $131,000 for a family of four. And much of that transfer has gone to support causes and regimes that are in fundamental opposition to America’s goals and values.
Aside from the magnitude of this wealth transfer, there are some other limitations of U.S. international indebtedness that should be acknowledged. Whether we want to or not, it can’t go on forever– at some point we’re going to have to reduce our net imports. One avenue by which this could happen would be through a depreciation of the dollar. If this were to come very quickly, accompanied by a sudden capital flight, it could be a very chaotic and damaging transition.
Other economists have raised the possibility that the capital inflows themselves have created some problems. Caballero and Krishnamurthy (2009) and Portes (2009) suggested that the accumulation of wealth by foreigners seeking high-yield but low-risk investments in the United States was an important cause of the proliferation of toxic leveraged assets that proved to be key factors in the housing boom and subsequent bust.
For these reasons, I agree with the position taken by both President Obama and Governor Romney that presidential decisions need to encourage more oil production in the United States.
However, I would add that policies that discourage U.S. consumption of petroleum would also achieve the same goal. For example, trying to make more use of our natural gas resources for transportation is an idea that should appeal to Americans on both sides of the political spectrum.
The presidential campaign has primarily been an effort to convince voters that the other party would be even worse for America than yours. Although that’s a discouraging spectacle for many of us, I retain the hope that, whoever wins the election, they might seize the opportunity to move the country in a more positive direction by focusing on some goals and strategies on which both political parties should be able to agree.
Increasing U.S. oil production and decreasing U.S. oil consumption should be two such goals.