BusinessWeek Writes:  A Shrinking U.S. Trade Deficit—Brought to You by Fracking

Almost entirely on the back of stronger exports, last week the U.S. Commerce Department revised upward its economic growth estimate for the second quarter, from 1.7 to 2.5 percent. Exports from April to June grew at their fastest pace in two years, pushing down the U.S. trade deficit to 2.7 percent of gross domestic product. That’s less than half what it was at its peak of around 6 percent of GDP in late 2005.

Most of the boost in exports came from tangible stuff sold abroad: goods, rather than services. The biggest among them were petroleum products refined from all the crude oil the U.S. is producing—unlocked by fracking. Through June, the U.S. has exported an average of 99 million barrels of petroleum each month over the past year. That’s roughly quadruple the amount the U.S. was exporting a decade ago.

The story of the shrinking U.S. trade deficit is essentially the story of the U.S. oil boom. The last time the U.S. came close to balancing out the trade deficit, at least in terms of its share of GDP, was just after a recession ended in 1991. To feed the broad expansion that followed, U.S. oil imports grew by more than 130 percent over the next 15 years, from 192 million barrels a month in early 1991 to a peak of about 455 million barrels a month in the summer of 2006.

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Finally, some good news for a change.  It would be nice to see America become energy independent over the next few decades. Not only is this great from a financial point of view, but a welcome news from a national security perspective. 

I see energy sector as a growth industry over the next few decades. At the same time, investment thesis in this industry is somewhat complicated.  My work clearly shows that the global economy is about to fall into another deep recession or worse. As that happens energy consumption should significantly decrease leading to much lower oil prices.  While international conflicts in the middle east can play a role in destabilizing the market once again and driving prices higher, I wouldn’t worry about it too much. Anything conflict in this area is likely to be short lived.

As fracking technology improves and production yields increase, expect a lot more oil on the world market.  I don’t think I have to tell you what happens when supply increases and demand goes down. A welcome news for the US Economy indeed. Unfortunately, given massive imbalances due to credit finance expansion over the last few decades, it will be of little help to the overall struggling US Economy.

Nevertheless, if you are able to pick winning companies in this sector, they should appreciate significantly. 

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