U.S. Oil: Imports and Exports (3/31/1991–9/30/2013)
U.S. Dollar Implications of the Shale Oil Revolution
The United States runs a current account deficit that stands at about 2.5% of gross domestic product (GDP). This deficit remains fairly large but has recently shown improvement: five years ago, the current account deficit stood at approximately 5% of GDP5. A sustained improvement in the current account deficit picture could be supportive for a stronger U.S. dollar.
Further, the nation’s non-oil current account deficit stood at 1% in the first quarter of 2013 vs. its total current account deficit of 2.4%. The oil balance stood at 1.4% in the first quarter of 2013, a material improvement from the peak of 3% in September of 2008.6
Moreover, the abundant supply of cheap natural gas is becoming a competitive advantage to bring back manufacturing to the United States and making the U.S. more competitive with foreign countries that have cheaper labor pools. This positive feedback loop that starts with the energy boom but feeds into other industries can reinforce this improvement in the import/export mix and trade flows of the U.S. dollar.
In the short term, politics, monetary policy and economic growth certainly trump these more long-term economic forces. But the point of this blog post is to question whether the dollar’s long-term decline during the 2000s is about to reverse.
Consider Currency-Hedged Investment Strategies
When considering the investment implications of the shale revolution, one often goes to oil-related companies. But I believe one should also think about the consequences for the U.S. dollar and how this impacts any investment denominated in foreign currencies—such as foreign equities.
Given potential for higher growth out of the U.S. due to spillover effects from the shale oil revolution, higher world growth momentum, and improving sentiment from sustained improvements in the current account, this could inevitably be supportive for the U.S. dollar in the years ahead. I believe this is further reason that investors should consider currency-hedged investment strategies when they look at their international equity allocations.
If there is a currency most at risk from shifting energy trade dynamics, it may be Japan’s. Japan’s trade balance of oil and gas has been worsening, especially as the yen has started weakening and Japan shut down its nuclear energy production. In a future post, we will compare Japan’s energy trade balance with the U.S. and what it could mean for the yen versus the U.S. dollar.
1Source: Wall Street Journal, “U.S. Is Overtaking Russia as Largest Oil-and-Gas Producer,” October 2, 2013.
2According to the U.S. Energy Information Administration (EIA).
3According to the U.S. Energy Information Administration (EIA).
4Source: Bloomberg, “Fracking Moves U.S. Crude Output to Highest Level Since 1989”, September 11, 2013.
5Source: EIA.
6Source: Bloomberg, October 2013
7Source: Bloomberg, October 2013
Important Risks Related to this Article
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations.