Excluding Oil, The US Trade Deficit Has Never Been Worse
Remember when in January 2010 Obama promised that he should double US exports in five years in a bid to collapse the US trade deficit? Not only that, but in his 2010 SOTU address, Obama doubled down by saying "It’s time to finally slash the tax breaks for companies that ship our jobs overseas and give those tax breaks to companies that create jobs in the United States of America."
Back then, Jennifer R. Psaki who was still a simple White House spokesperson, said that the White House "had been working for several months on a policy to increase exports. She said the plans included the creation of an export promotion cabinet and steps to help small and medium-size businesses tap markets in other countries. "
Well, it isn't quite five years later (he still has six months), but we doubt that anyone would have expected what the outcome of Obama's export boosting campaign would be. We show it below in the following chart which captures the US trade deficit, excluding oil.
What this chart shows is that when it comes to core manufacturing and service trade, that which excludes petroleum, the US trade deficit hit some $49 billion dollars in the month of May, the highest real trade deficit ever recorded!
In other words, far from doubling US exports, Obama is on pace to make the export segment of the US economy the weakest it has ever been, leading to millions of export-producing jobs gone for ever (but fear not, they will be promptly replaced by part-time jobs). It also means that the collapse in Q1 GDP, much of which was driven by tumbling net exports, will continue as America appear largely unable to pull itself out of its international trade funk, much less doubling its exports.
What's perhaps just as bad, is that the chart above shows that global trade continues to collapse: just recall the near standstill in Chinese trade, both exports and imports, that took place earlier this year. We wonder: is the fact that the world is trading with each other at the slowest pace since the Lehman collapse also due to harsh winter weather?
Yet while core trade is the worst ever, overall US trade is not all that bad. Why? Because of the shale revolution of course, and the fact that net US petroleum imports have plunged.
Note, the above chart does not imply the US is a net exporter of petroleum, especially considering the recent news surrounding the easing of the oil export ban. That simply won't happen as was explained previously. What it does show is that oil imports as a percentage of the total US trade deficit continue to decline, even if the US still remains a net oil importer. Which is curious because as Bloomberg reports, "the U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia as extraction of energy from shale rock spurs... U.S. production of crude oil, along with liquids separated from natural gas, surpassed all other countries this year with daily output exceeding 11 million barrels in the first quarter, the bank said in a report today. The country became the world’s largest natural gas producer in 2010. The International Energy Agency said in June that the U.S. was the biggest producer of oil and natural gas liquids."
So even with the world's biggest crude production, the US still needs to import nearly $9 billion in petroleum goods every month? That is hardly enough to offset the massive loss of jobs experienced in other non-energy sectors of the economy which unlike oil, have never seen a worse trade deficit.
Furthermore, even as the energy sector soaks up some $200 billion in capex or some 20% of the total private fixed-structure spending, the US shale renaissance will only persist for another 5 or so years before the output rates peak and resume their downward direction:
U.S. oil output will surge to 13.1 million barrels a day in 2019 and plateau thereafter, according to the IEA, a Paris-based adviser to 29 nations. The country will lose its top-producer ranking at the start of the 2030s, the agency said in its World Energy Outlook in November.
Or sooner. Or later. The funny thing about petroleum production is how dependant on extraction technology it is. Still, while the shale revolution has been a blessing since the Lehman collapse, it may be on the verge of some serious disappointments: recall back in March when the Monterey Shale, whose reserves were said to account for two-thirds of all recoverable US shale oil resources, saw the EIA cuts these estimates by a whopping 96% overnight!
Furthermore, as we also reported back in March, the US may well have hit the tipping ROI point, as shale costs have exploded in recent months. In fact, the one thing that may be masking the increasing unprofitability of shale production in the US is that old standby: debt. Some of the choice fragments from the indepth look at the shale industry, from Shale Boom Goes Bust As Costs Soar:
The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.
Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
“The list of companies that are financially stressed is considerable,” said Benjamin Dell, managing partner of Kimmeridge Energy, a New York-based alternative asset manager focused on energy. “Not everyone is going to survive. We’ve seen it before.”
In a measure of the shale industry’s financial burden, debt hit $163.6 billion in the first quarter... companies including Forest Oil Corp. , Goodrich Petroleum Corp. and Quicksilver Resources Inc. racked up interest expense of more than 20 percent.
Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.
But one doesn't need to look at the shale driller's balance sheets to know that something is afoot: a quick glimpse at recent Bakken shale dynamics, shows that the well efficiency has topped out and the only offset is the exponentially rising number of wells: an exponential line which as the excerpt above shows is only sustainable courtesy of ZIRP and ultra cheap debt. If and when the Fed's generosity ends, watch out as the shale day of reckoning finally arrives .
In any event, the above shale discussion is tangential - perhaps the US will uncover new technologies to tap even more oil, at lower prices and higher efficiencies. But probably not, as even the E&P industry is increasingly more focused on buybacks and cashing out here and now, than on capex and R&D spending.
Ironically, it is precisely the oil industry in general, and shale in particular, that Obama blasted as recently as 2011. As the NRO helps us recall, it was back in 2007, Obama said he wanted to free America from “the tyranny of oil.” In 2011, he called oil “yesterday’s energy.” He also decried the profits being made by the oil and gas sector and declared that it was time to repeal the tax preferences given to it (which cost taxpayers about $4 billion per year), calling them “oil-company giveaways.” How ironic is it, then, that it is precisely the oil companies which prevent the soaring US trade gap in all other goods and services to disintegrate the US economy completely.
In any event, in a world in which trade increasingly does not matter (because central banks supposedly can and will merely print "prosperity" to offset the lost wealth that comes with international trade and comparative advantage, a concept that has been around since the late 1700s), it is becoming clear that America has certainly adhered to the Fed's mission of forcing capital misallocation worse than ever, by focusing not on being competitive in an increasingly more technological and sophisticated world, but merely pretending that an economy can achieve escape velocity almost exclusively through stock buybacks.
And yet somehow there are those who still vouch for 3% GDP growth any minute now, a renaissance in capital spending also any minute now, just, well, never now, and who believe that some 285K jobs can be created at a time when the US economy is freefalling and the M&A bubble is laying off tens of thousands every month left and right all in the name of the almighty EPS beat.
But then again, Obama still has 6 months to make good on his promise to "double US exports in 5 years." We are confident that in retrospect, just like in all of his other public appearances, he will have spoken nothing but the truth...
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