The Macro Lunch: Lower Oil Prices Shrinks Trade Deficit

The US trade deficit stood at $40.6 billion in December, up about 6% from $38.3 billion. Comparing the trade deficit data with Oil prices, we can see they moved in lockstep since Oil started its decent from its bubble days. This correlation continued all the way down to 30 dollar Oil in late 2009, and on its way back up to the present.  With a certain level of certainty, you can be sure that whichever way you see Oil prices headed determines your view of how the Trade Deficit will play out too.

This makes things a lot easier. Think about all the time you’ll save not having to listen to politicians and pundits rants about trade and protectionism. All the talk of opening up free trade with closed nations so we can increase exports, and unions trying to protect American workers – it’s kind of filler isn’t it? Even the notion of China unfairly keeping the Yuan undervalued to maintain an upper hand in trade becomes just an extra story. It is worrisome that the annual trade deficit with China is over $273 billion, an all time high, but in the aggregate, it’s all just Oil prices. At 11 billion barrels consumed a day, we send more than $30 billion/month overseas for Oil. That’s easily more than the China deficit.

President Obama set a goal in his State of the Union of doubling American exports in the next 5 years. Perhaps he should just look for ways to break that correlation between Oil and the Trade Deficit.  I can’t help but think that if we keep oil prices down, then the Trade Deficit problem takes care of itself. Now, there are a few ways to do this – Get a stronger dollar by having the Fed put the brakes on the $600 billion debt-buying campaign.  Or, focus on alternative energy and energy efficiency to lessen our demand for oil. The strength of the dollar is a double-edged sword. Too strong and we lose our new-found competitiveness on exports, too weak and Oil prices keep driving the trade gap higher. But energy efficiency is easily possible – in cars, in homes, etc.

The good news in the Trade Deficit data is that US exports were up 1.8% and imports up 2.6%, showing we were on the rebound, at least in December. Consumer sentiment data also came out today, up a few ticks from January. If this recovery is for real, then I think it’s high time for America to get rid of some of her old bad habits.

– Raj C. Udeshi

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