Oil Prices

In: Business and Management

Submitted By evglam
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Oil Prices and the U.S Trade Deficit

Along with the financial industry, chemical industry and entertainment industry, the energy industry is one of the top markets in the United States with oil production as one of its core essentials. Since the beginning of 2002, oil prices have almost quadrupled overtime. The United States is estimated to be the number one country of oil consumption therefore making the soaring prices one of the major concerns within the country. Although the amount of U.S imports and exports have varied overtime, recently the U.S has been running trade deficits. With the price of oil increasing, an oil-importing country like the U.S will have a substantial increase in the cost of petroleum imports therefore suggesting the deterioration of their trading deficit will be even greater.

In this study, Michele Cavallo examines the changes of oil prices and how they affect a number of different factors. These factors include the slow-paced growth in oil production creating has an increase in demand which has outpaced the increase in supply. Cavallo explores the relationship between the surge in oil prices and trade, how the U.S trade deficit evolves in response to higher oil prices and furthermore creates a model that helps explain how the import of oil, despite the increase in price, remained constant and what affect it has on the trade deficit.

Using data from January 2002 to July 2006 for overall trade balance and the petroleum trade balance, Cavallo managed to use her model to prove that higher oil prices and higher costs of petroleum imports have in fact accounted for over 50% of the deterioration in the overall U.S trade deficit during that period. Specifically, the growth of petroleum-related trade had increased from $14 billion to $26 billion indicating the deterioration accounts close to 80% of overall trade deficit.

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