Oil and the Trade Deficit

Since 2011, surging oil production in the US has allowed the country to bring its trade deficit back into a comfortable zone without the need for the draconian oil consumption cuts witnessed in Europe or Japan. 

But what happens now?  Does the US trade deficit continue to decline until an equilibrium volume of oil is produced in the US?  Does the US become a net exporter, as it was before the 1980s?  Or does the overall deficit stabilize in a given range, with improvements in the oil trade offset by increased imports of other goods?

US Monthly Trade Deficit, Seasonally Adjusted

Source: Data from BEA via Calculated Risk, Arrows & Annotations from Prienga

Recent data suggest the latter.  It appears that the trade deficit overall has settled into a kind of 'comfort zone' for the US economy.  Therefore, improvements in the oil trade are being offset by increased imports of other goods.  This in turn suggests that the US is now pulling the global economy forward at a pace of $120 bn / year compared to a year ago.

Given the collapse of oil prices, the US oil trade deficit is likely to fall by another $5 bn per month.  If this too is offset by greater imports, then the US will be stimulating the global (non-oil exporting) economy by $180 bn per year in 2015, compared to 2013.  This will help Europe, China and Japan.

I would add that the "PIGS" (Portugal, Spain, Ireland and Greece) still spend huge amounts importing oil, and their reduced oil imports bill will also help those economies.  That is, they will benefit from both increasing exports and decreasing imports, in dollar terms.

As I have stated before, if oil prices remain low, then expect a really good year coming up for the US economy, an incipient recovery in northern Europe, and a surprisingly good year for the PIGS.