Fun with Exhibit 17

The BEA release can be seen here.

I had some fun with math at a 5AM this morning reading the most recent BEAs report on our trade deficit last quarter. One particular exhibit, number 17 I spent some quality time with. Here is the link to the full report above.

Straight from the report, we spent about $100.3 billion on oil imports in the quarter on about 1.151 billion barrels of oil. On average that looks to me like about $87 dollars a barrel which with oil at $126 right now is quite a bargain.

With this higher price of oil, how is that going to impact our overseas borrowing needs? Last year we imported about 4.7 billion barrels during 2007 and while demand growth is moderating we have not yet seen substantial declines below that level. Assuming this price stays flat at $126, that $40 dollar increase in the price of oil is going to cost an extra $186 billion, with a total estimate spent on oil of $588 billion imports. That does not count the amount of oil we produce domestically and consume internally.

Our entire deficit in 2007 was “only” $700 billion. Even if we are somehow able to keep this deficit flat despite increased costs of oil by increasing exports from a deflated dollar, that $588 would account for 84% of a flat $700 billion number. Even if it ends up being slightly less, that’s a huge number from just one item. How much would it cost to subsidize a move by consumers to cars powered by alternatives such as electric or natural gas? Or some combination of alternatives?

In 10 years at a run rate of $700 billion a year, would the subsidy required be more or less then the $7 trillion we’ll spend on oil? My guess is substantially less, and it won’t turn the United States into a third world country like it's doing right now.

Nobody in the rest of the world wants to spend money on oil either so we might actually regain competitive advantaged in an automobile industry based on a new fuel standard.

What happens if oil hits $200? Or $250 a barrel which at the current rate is possible during the summer driving season. Well, it won’t be helpful. You are talking about levels that will drive the dollar down substantially and potentially drive interest rates racing towards 8%. It won't matter what the Fed discount rate is at--rates will be driven higher by an unwillingness of foreigners to lend.

The rise of middle class in BRIC is a fantastic thing, and will bring great opportunities for our exporters. If we can stick to free trade and open these markets up, our economy should prosper. A lower priced dollar also makes the US a competitive manufacturing base. However, our over reliance on petroleum to fuel cars is resulting in the largest transfer of wealth since the fall of Britain as a world superpower after World War I and if oil increases further, we won’t be able to sustain it.

It would be one thing if this wealth was going towards productive investment such as the 1880s buildout of our railroad infrastructure or building highways or factories. But it’s for something that pretty much evaporates the minute it hits our borders. Is the cheap dollar allowing us to expand manufacturing and regain some international competitiveness. You bet. But the rise in exports can’t keep up with this dramatic rise in oil imports.

None of this is aided by a massive program by countries like China, India, and elsewhere to subsidize the cost of petroleum in some cases pushing prices down to well below a dollar a gallon. Also people point out that the cost of oil is much lower relative to the last energy crisis in the 70s but in truth we produce a lot less of our own oil needs relative to back then. i.e. we profit a lot less because our production levels are much smaller given the wells have run dry and new production is limited to non existent.

I pretty much will vote for any candidate that I believe can implement a solid energy plan to break our dependence on petroleum for autos. Most of the other issues are somewhat trivial by comparison or don't differ dramatically and it’s the one thing that could truly change the global economic dynamic. And if you end the reign of the oil markets on the world economy, you will stop subsidizing the petty religious and political dictatorships that seem to set up on top of oil fields everywhere.

Note. Some of my math I was not quite able to back out. For example I came up with about 40% of our oil as produced domestically if you assume we consume 25% of total world production of 85 mbpd. I've heard much smart guys than me say the US produces only about 20% of its needs compared to 40% in the 70s.