Oil and the Trade Deficit

The inaugural report from the Diplomatic Council on Energy Security highlights petroleum as a crucial component in the growth of the U.S. trade deficit to a potentially unsustainable and damaging level.

Despite a third-straight year of growth in domestic oil production and a first year of net petroleum product exports since 1949, the U.S. trade deficit in oil increased to $327 billion in 2011. In fact, progressively higher oil prices have increased the total cost of the net U.S. oil import burden in recent years, even as imported volumes have declined.

The nation has run an aggregate trade deficit of more than $1.5 trillion since 2007, and in fact sustained a deficit with the rest of the world for more than a quarter of a century. Over the past decade, however, the size of the U.S. trade deficit, in part driven by the increased cost of net oil imports, has grown significantly. Its current size, totaling more than half a trillion dollars in 2011, cannot be sustained indefinitely. It creates significant risks and vulnerabilities for the U.S. economy, including an increased dependence on consistent capital inflows from foreign entities. This compounds America’s international debt burden while lowering the prospects for long-term U.S. economic health. The emergent challenge provides yet another important argument for taking critical steps to end American dependence on oil.