- The Washington Times - Saturday, September 17, 2005

The international trade report for July, released Tuesday by the Commerce Department, revealed that the United States had achieved a record trade deficit in goods of $62.4 billion, measured on a three-month (May, June, July) moving-average basis. Interestingly, that represents an increase of 82 percent since February 2002, when the dollar hit its cyclical peak, from which it has fallen in real terms by 12 percent, according to the Federal Reserve’s broad dollar index.

Theoretically, after a lag, a nation’s trade deficit should decline when its currency depreciates. Of course, one major reason why the U.S. trade deficit has continued to soar despite the dollar’s depreciation can be traced to the upwardly spiraling price of oil and America’s increasing dependence upon foreign suppliers to satisfy its seemingly insatiable appetite for petroleum products.

Commerce data reveal that the volume of petroleum imports increased 7.3 percent in 2003 and 5.6 percent in 2004. For the first seven months of 2005, compared to the January-July period in 2004, the rate of increase in the volume of petroleum imports has decelerated to 2.2 percent. Meanwhile, the price of petroleum has been skyrocketing. Petroleum imports cost $100 billion ($23.18 per barrel) in 2002, $130 billion ($27.82 per barrel) in 2003 and $175 billion ($35.48 per barrel) in 2004. In July, when the average price exceeded $50 for each of the 13.5 million barrels of petroleum imported every day, the nation’s monthly bill for imported petroleum reached $21 billion. On an annualized basis, July’s cost exceeds $250 billion, which is two and a half times America’s petroleum-import bill for 2002. July, of course, was pre-Katrina. Oil prices reached record nominal levels before and after the Aug. 29 hurricane played havoc with oil production in the Gulf of Mexico and shut down key petroleum-infrastructure assets.

Much is made of the fact that America’s economy has become far less energy-intensive than it was in 1973 and 1979, when the Arab oil embargo and the Iranian Revolution, respectively, precipitated the two deepest post-World War II recessions. Since 1972, for example, U.S. total energy consumption has increased by 37 percent while the U.S. economy has expanded by 162 percent. Over the same period, U.S. consumption of petroleum has increased from 16.4 million barrels per day in 1972 to 20.7 million barrels per day in 2004, or by 27 percent (figures may not be precise because of rounding).

However, while the U.S. economy has become less energy-intensive and relatively less dependent on petroleum since the early 1970s, U.S. reliance on imported petroleum has increased significantly. While petroleum consumption may have risen only 27 percent since 1972, U.S. petroleum imports, for which no substitutes are available in sufficient quantities, have increased by 177 percent, rising from 4.7 million barrels per day in 1972 to 13.1 million in 2004. June 2005 petroleum imports actually exceeded 14.2 million barrels per day.

Thus, imported petroleum accounted for 29 percent of U.S. petroleum consumption in 1972; last year, imports represented 63.4 percent of petroleum consumption; and in June, the ratio exceeded 67 percent. Even if the estimated oil reserves in the Arctic National Wildlife Refuge (ANWR) were fully exploited — a policy option this page has enthusiastically supported — the fact remains that ANWR output would do little to mitigate America’soil-import-dependency dilemma.

Reviewing what has occurred in the petroleum market since 1995 is instructive for the future. From 1995 (when 17.7 million barrels per day were consumed) through last year (20.7 million), U.S. petroleum consumption increased by 3 million barrels per day (17 percent), reflecting a compound annual growth rate of 1.75 percent. Over the same period, petroleum imports increased by 4.3 million barrels per day, rising from 8.8 million to 13.1 million (49 percent) and reflecting a 4.5 percent compound annual rate of increase. Meanwhile, U.S. GDP increased by 34 percent, or 3.3 percent per year. In other words, the U.S. economy has become less energy-intensive since 1995 (total energy consumption has increased by 9.3 percent compared to the 34-percent increase in GDP); but our dependence on imported petroleum has grown so much that the 4.5 percent annual growth rate for imported petroleum (1995-2004) is nearly 40 percent higher than the nation’s average annual economic growth rate of 3.3 percent.

Before we break our arm from patting ourselves on the back for developing an economy that has become demonstrably less energy- and petroleum-intensive, let’s consider a few back-of-the-envelope calculations. If U.S. petroleum consumption continues to increase by 1.75 percent a year, as it has since 1995, then by 2025 U.S. demand for petroleum will have increased by 44 percent compared to 2004. We would be consuming 29.8 million barrels of petroleum per day in 2025, which is not much different from the 27.9 million barrels projected by the U.S. Department of Energy (DOE) using an annual growth rate of 1.5 percent. Given DOE projections for domestic petroleum production, maintaining a 1.75 percent annual growth rate in petroleum consumption would require America to import 21 million barrels per day in 2025. That would represent an increase of 60 percent from last year’s level of 13.1 million barrels. And that percentage increase assumes that the annual growth rate of imported petroleum would be more than slashed in half, falling from 4.5 percent (1995-2004) to 2.2 percent (2005-2025).

In other words, the leaders of both political parties over the last 30-plus years have been endlessly pledging to make the United States, at a maximum, “energy independent” or, at a minimum, far less dependent on the Middle East (where two-thirds of the world’s proven crude-oil reserves are located, according to World Oil). In reality, if business-as-usual policies continue to be pursued and based on petroleum-consumption trends since 1995, America would be importing nearly five times as much petroleum in 2025 (21 million barrels) as it did in 1972 (4.7 million) before the Arab oil embargo.

Today, we are much closer to 2025 than we are to 1973, after which we collectively did so very little as our petroleum-dependency problems worsened. Why would anybody expect Katrina’s wake-up call to change more than three decades of inaction and unfulfilled pledges?

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