Issue of the week: Imported Oil Grows Trade Deficit

In recent months, we’ve seen some positive economic data that indicates an economic recovery may be underway.  So, why is the U.S. trade deficit – the difference between the value of what we are importing and what we are exporting – growing?

Part of the reason is that Americans are starting to spend more, and because of the way our economy and manufacturing base have evolved over several decades, more of the things they are buying are made in another country. Indeed, this is the highest the trade deficit has been since the start of the U.S. financial crisis.  Last week’s news that the U.S. trade deficit grew 2.7% in 2011 means in part that American consumers are spending again.

But while economists may look to shifting trade deficit data as a sign of American’s spending power, there’s also another major component that isn’t discussed as often. That’s the part about high oil prices and oil imports and how they impact the trade deficit. In fact, more than half of the total 2011 trade deficit – 59.4% can be attributed to oil imports. Imported oil has long accounted for so much of the trade deficit that economists often refer to the non-oil trade deficit as a measure of shorter-term trends in the economy.

There are several reasons why it’s also important to focus on the oil trade deficit. For one, the trend is worrying. Oil as a percentage of the total trade deficit has gone up every year since 2002, when it accounted for 19% of the total. Imported oil’s share of the recent trade deficit is the highest it has been since 1992. And if you’re wondering about actual dollar amounts, the U.S. spent $331.7 billion on imported oil last year. A rise in oil prices, which is often seen during an economic recovery, would mean an even larger trade deficit.

But it’s not inevitable that our country must spend so much buying oil from overseas. Terms like “non-oil trade deficit,” imply that oil is an essential import. The reality, as readers of this blog understand, is that tapping into more of our domestic oil and gas resources, from Alaska to the Gulf of Mexico to onshore oil to oil shale, could take a big chunk out of our total trade deficit. Increasing our domestic oil production is the best way for is to address the oil trade deficit. It is a big win for the US economy

Finally, signs of economic recovery notwithstanding, our national economy remains fragile. Unemployment is high and consumer sentiment is wavering. And while a growing trade deficit might be linked to a strengthening economy in the short term, it is no way to build a stronger domestic economy over time. President Obama has addressed the non-oil part of the trade deficit with an initiative that aims to double U.S. exports by the year 2015. We need an equally strong commitment to reducing the amount we spend on imported oil.