The substantial increase in the supply of energy from the United States is dramatically affecting US trade flows. US crude oil production has increased about 29% and natural gas production has grown 33% since 2005. To analyze the impact on trade flows, we must first examine what has happened to US energy consumption.
Energy consumption trends have been quite interesting. US oil consumption has actually been declining during the last five or six years just as oil production has increased. The opposite pattern has occurred with natural gas, with consumption rising more or less in tandem with increased production. The reasons have to do with relative prices and environmental issues. Compared to crude oil, natural gas is now much cheaper in terms of a BTU of energy. Natural gas is also a cleaner burning fuel than coal. Because of the relative price difference in favor of natural gas, there has been a tendency to consume the additional natural gas domestically, at the expense of crude oil where possible. In the electrical power generation industry, cleaner burning natural gas has been aggressively substituted for coal.
As might be expected, the primary initial impact of rising US energy production has been on crude oil trade flows. With simultaneous downward pattern in US crude oil consumption along with increased production, the decline in US Crude oil imports has been quite dramatic. Also, due to geographic and transport cost efficiencies, we are seeing US crude oil imports rise from their low base levels prior to 2005. Combining the three trends of higher domestic oil production, lower consumption, and more exports, the net crude oil import bill has shrunk dramatically. Indeed, China is now a larger net importer of crude oil than the US.
Interestingly, the increased natural gas production has had its impact on trade flows through coal. That is, the additional natural gas production has largely been consumed domestically, partly at the expense of coal consumption for electrical power generation, so exports of coal also have increased rather sharply. Indeed, coal exports were up over 100% in 2012 compared to 2007.
All of these trends in US energy production and consumption have brought the US a little bit closer to energy independence, although energy independence is still not close at hand. Since it will be much more efficient to continue to import certain energy supplies, what is at stake is the US energy import/export gap, which certainly has narrowed considerably. Moreover, for geo-politics, it is the crude oil import-export balance that matters most. In terms of oil, the US is nowhere near the point where exports would equal imports. Domestic production would have to nearly double to achieve net import/export neutrality for crude oil, and that assumes continued declines in domestic oil consumption.
Bluford (Blu) Putnam has served as Managing Director and Chief Economist of CME Group since May 2011. This post was republished with permission from Indexology, a blog published by S&P Dow Jones Indices. The posts on the Indexology blog are opinions, not advice. Please read its disclaimers.