Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Implications of Recent U.S. Energy Trends for Trade Forecasts

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Implications of Recent U.S. Energy Trends for Trade Forecasts

Article excerpt

(ProQuest: ... denotes formulae omitted.)

International trade is a growing share of economic activity in the United States and a determinant of economic growth. Over the last three decades, exports and imports have more than doubled as a share of gross domestic product. Moreover, the contribution of net exports to economic growth has also increased from a small drag from 2002 to 2005 to a positive contributor from 2006 to the end of 2013. Energy net exports were a substantial part of this change, as their contribution to annual real GDP growth increased from -0.1 percentage point (a drag) to 0.2 percentage point in the same periods.

Over the last two decades, two new technologies-hydraulic fracturing and horizontal drilling-brought significant structural change to the energy sector. After declining or holding steady from 1975 to 2005, energy production-including crude oil, natural gas, and natural gas liquids-increased starting in 2006. Partly as a result, net energy imports as a share of energy consumption fell by about half from 2005 to 2013 after having risen five-fold from 1960 to 2005.

Future policy changes could bolster these effects. The Energy Policy and Conservation Act of 1975 (EPCA) banned the export of most crude oil in an attempt to insulate the United States from worldwide price shocks. If this ban is lifted as some expect, however, the recent changes in energy technology may have even larger effects on energy exports and thus overall exports.

This article examines how changes in energy production-and the resulting effects on U.S. energy imports and exports-affect trade forecasts. Exports and imports are typically determined by variations in foreign growth and domestic demand, respectively. Energy imports and exports, however, are mainly driven by technological improvements in crude oil and natural gas production. Consequently, distinguishing energy from non-energy components of trade may be useful in forecasting import and export growth, especially if forecasters want to know the effect of future energy production on the trade forecast.

Results from a model separating these components suggest U.S. energy imports will continue to decline while U.S. energy exports increase. However, the growth of energy imports and exports will differ from that of non-energy imports and exports. For example, real energy imports are expected to decline in 2014 and 2015, while real non-energy imports are expected to increase. The analysis also suggests slightly higher future energy production could lead to a significant drop in future energy imports. Finally, the analysis predicts net energy imports will decline 40 percent in 2014 and 2015, reducing the current aggregate real trade deficit by about 14 percent.

Section I reviews three decades of trends in energy production, consumption, and net imports. Section II estimates models for export and import growth, separating energy and non-energy components. Section III uses the estimated models to forecast imports and exports and to consider the effect of even faster growth in domestic energy production.

I. TRENDS IN CRUDE OIL AND NATURAL GAS PRODUCTION AND CONSUMPTION

Hydraulic fracturing, or " fracking," and horizontal drilling have had a significant effect on energy production. Although shale holds large amounts of natural gas, this gas had been difficult to extract before fracking was introduced. Fracking shoots water, chemicals, and sand into wells, creating fissures in the rock formations and thereby freeing the trapped gas. Fracking was developed in the 1940s, but the Mitchell Energy & Development Corporation made the first investment in large-scale hydraulic recovery in the 1980s.1 At the same time, the Devon Energy Cor- poration was developing horizontal drilling techniques. With this technology, energy producers first drill down and then drill at an angle or even sideways. In this way, more of the reservoir is available and more gas can be recovered. …

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