The prospect of American energy independence is getting a lot of people excited, whether it is Democrats waxing romantic about an industrial renaissance or Republicans rejoicing in the snub to OPEC implied by less dependence on imported oil. Few, however, are looking at the swelling petroleum exports and considering how that might reduce America's trade deficit and lead to a stronger dollar.
Even without removing the protectionist ban on crude oil exports imposed in the 1970s, America's massive energy trade deficit is falling quickly, which is having a big impact on the current account. In November, America spent $34-billion (U.S.) more on buying stuff from abroad than it received from selling stuff to other nations It was the lowest deficit since 2009, thanks to record exports of $195-billion. Since 2008, more than half of the U.S. trade deficit has been due to petroleum imports but, thanks to the shale output, imports are now falling and, equally important, exports of refined oil products are soaring.
Since 2008, American refineries have been ramping up their export business, taking advantage of the weakness of the domestic crude price to sell gasoline, diesel and jet fuel on world markets for profit. The increasing importance of this business can be seen in the figures for exports of finished petroleum products, provided by the Energy Information Administration. These have risen from about 1.3 million barrels per day in January 2008 to their current level of about 3 million barrels per day.
The effect of this shift in trade flows on the U.S. balance of payments has been dramatic. Given the extent to which the rising cost of imported oil has in the past enlarged the U.S. deficit, we must now consider what the effect on the U.S. currency might be of rocketing U.S. oil output (the EIA reckons that in 2015, it will reach a peak of 10 million bpd, last experienced in 1970) and the possibility of liquefied natural gas exports, if not crude oil exports.
It will mean a rising U.S. dollar as the U.S. current account moves from deficit to balance and then possibly into surplus over the coming decade. It's an idea that recently emerged in a presentation by Christof Ruehl, BP's chief economist, when he considered the wider benefits of shale oil: "If you were to ask any economist what would be the potential biggest source of global instability over the past 10 years, [most] would include macro-economic imbalances – the big trade deficit in the U.S., the big surplus in China. In that respect, all of a sudden, a force for good seems to have emerged."
This is vastly more important than the possibility that cost pressure will ease slightly on a few unprofitable and low-tech U.S. manufacturers of commodity goods. Artificially cheaper oil and gas is not great for America and dirt cheap fuel is worse, contrary to what foolish protectionists will tell you. The discounted value of U.S. and Canadian oil (in relation to global prices) is a subsidy to industry that over the long-term would leave manufacturers dependent on cheap energy, reduce their competitiveness and remove the stimulus of market pricing – a spur that, in the energy industry, made the fracking revolution possible.
The U.S. current account deficit has been a dead weight on the dollar. During the credit boom of the mid-2000s, that deficit reached $800-billion as Americans borrowed heavily to finance imports of crude oil from the Middle East, Africa and Latin America. In turn, the Petrostates invested their surpluses in U.S. Treasury bills, creating a petroleum money-go-round of expensive oil financed by low interest rates and shrinking greenbacks.
Could America (and the world) now be moving into a virtuous circle where more North American domestic oil and gas output reduces the trade deficit? This would remove the cycle of trade debt, where foreigners lend to Americans to buy the oil they need, reducing the downward pressure on the dollar. In other words, we might be entering a world where the U.S. dollar becomes more like a petrocurrency itself. It would remove some of the huge imbalances and restrain the Federal Reserve from its current activity of feeding cheap dollars into the pockets of oil exporters in the hope that they buy more of America's ballooning debt.
For all this to happen smoothly, we need free rein for exporters of American oil products, whether they be natural gas, crude oil or jet fuel. That will lead to U.S. energy prices attaining an international equilibrium that will be high enough to stimulate more exploration and more oil and gas. This will be good for Canada, which will benefit from both higher energy prices and a higher U.S. dollar. It won't please American cheap energy junkies and it won't be an entirely easy ride for American exporters, as a higher dollar and tighter Fed policy would be an unexpected new regime for Americans to cope with. But it will lead to a healthier U.S. economy – one that's less indebted, more creative and better for the world.
Carl Mortished