Trading Places: How the Shale Revolution Has Helped to Keep the U.S. Trade Deficit in Check
The shale revolution and its effect on the U.S. economy and trade balance
This article ran in a special section of the Wall Street Journal published on March 12, 2019.
In the early 2000s, U.S. oil and gas production appeared headed in one direction — down. The only question seemed to be how far down. At that time, most observers predicted the United States would grow increasingly dependent on imports of both commodities in the future. But since the middle of the last decade, the shale revolution has led to a huge turnaround, brought on by the resurgence of domestic oil and gas output. What is not well-recognized is how positive this is proving to be for the U.S. trade balance — reducing the annual merchandise trade deficit by $275 billion from what it would have otherwise been.
U.S. now imports 12 percent of its total oil, compared to 60 percent a little more than a decade ago. The natural gas trade balance also shifted markedly: Imports accounted for about one-sixth of domestic consumption a decade ago, but the U.S. is now a net gas exporter and headed to be a much larger one.
The combined effect of these changes has been very big: IHS Markit estimates that without the shale revolution, the U.S. merchandise trade deficit, which totaled about $800 billion in 2017, would have been more than 30 percent larger. In coming years, further growth of domestic oil and gas production is projected to shift the U.S. energy trade balance even more. In developments most would until recently have thought improbable, the U.S. is poised to become one of the world’s biggest exporters of liquefied natural gas (LNG) and a net petroleum exporter by the early 2020s. Indeed, the strength of the United States as an energy provider features prominently in current trade discussions with China.
Booming oil and gas production
The shift in the energy trade balance has been driven by surging production of oil and gas. Between 2007 and 2017, domestic output of crude oil and NGLs (natural gas liquids) in the U.S. rose from 7 million barrels per day (mbd) to 13 mbd in 2017 and 15 mbd in 2018. This increase contributed to a sharp fall in U.S. petroleum net imports — as measured by the net trade position of crude oil plus NGLs plus refined products — from about 12 mbd to 4 mbd between 2007 and 2017. In terms of crude, production increased from 5.1 mbd in 2007 to 11.9 mbd in January 2019 and could reach or exceed 13 mbd by the end of this year. A similar surge is occurring in natural gas. U.S. Lower 48 gas production has grown rapidly of late, from about 52 billion cubic feet per day (bcf/d) in 2007 to an estimated 83 bcf/d in 2018. In 2007, the U.S. had net gas imports of 10.4 bcf/d; in 2017, it had net exports of 0.4 bcf/d, with the United States emerging as an exporter of liquefied natural gas (LNG). Plants originally envisioned to receive LNG imports have been reconfigured as export terminals, and many new plants are under development. Since the first shipment from the Lower 48 in February 2016, U.S. LNG exports have ramped up to about 3 bcf/d, with deliveries to more than 25 countries by vessel already — expected to grow substantially over the next few years. At this point, U.S. exports to Mexico are larger than LNG exports and account for 60 percent of Mexico’s total natural gas demand.
Deficit to surplus in downstream markets
The same trends have been seen in markets that rely on crude oil, NGLs, and gas as inputs. Between 2007 and 2017, the trade balance for refined petroleum products shifted from net imports of approximately 1 mbd in 2007 to net exports of 2 mbd in 2017. The U.S. refining sector is among the most competitive in the world for several reasons. Oil prices in the U.S. are often lower than elsewhere, due to fast-rising domestic output, and processing costs are also lower, given the relatively low cost of natural gas as a feedstock. The U.S. refining base is also highly efficient and benefits from excellent economies of scale.
The impact is not limited to petroleum and petroleum products. The trade balance for chemicals derived from gas and NGLs also shifted dramatically between 2007 to 2017, from net imports of 6 million metric tons per year (MMt/y) to net exports of 4 MMt/y. The availability of low-cost natural gas and NGLs (the feedstock for ammonia, methanol, and olefins and olefin plastic derivatives) has prompted a large expansion of petrochemical manufacturing capacity along the Gulf Coast. The U.S. has shifted from being a disadvantaged region in this industry segment to an advantaged region, second only to the Middle East, drawing in a great deal of domestic and foreign investment. Rising methanol and ammonia output have been the primary forces behind the flip from a U.S. trade deficit to a trade surplus in gas- and NGL-based chemicals.
Big impact on the trade balance
These developments have all combined to moderate the overall U.S. trade deficit. The effect is dramatic. Without the shifts that have occurred over the past decade in the balance of trade in industry segments tied to oil and gas production, IHS Markit estimates that the U.S. merchandise trade deficit, which totaled about $800 billion in 2017, would have been approximately $275 billion higher. And we project that the U.S. trade balance in these segments will improve by at least another $75 billion by 2022.
The shift in the balance of trade in energy has had one very notable effect: significantly reduced dependence on imported oil. The shale revolution has also supported additional investment in manufacturing, which has had the beneficial effect of slowing the growth of imports in that sector.
Today, the United States is a net exporter of refined products, NGLs, natural gas, and gas- and NGL-based chemicals. And with anticipated future increases in domestic production, the U.S. is projected to become a net exporter of petroleum — crude oil plus NGLs plus refined products — by the early 2020s. This would be a historic shift. The United States has been a net petroleum importer since at least 1949. Further reductions in the country’s reliance on petroleum imports will improve domestic energy security by blunting the impact of unexpected disruptions of oil supply from abroad — although, to be sure, there is only one global oil market.
The shale revolution has unleashed a wave of investment in the energy sector and helped the U.S. economy on many fronts. It has had an especially profound and positive effect on the U.S. trade balance, one that will continue to resonate — and grow — in coming years.David H. Witte is Senior Vice President and Division Head for Energy & Chemicals at IHS Markit. Jeff Meyer is a Director of Energy and Mobility at IHS Markit. Daniel Yergin is Vice Chairman of IHS Markit.