Has the Natural Gas Boom Impacted the Trade Deficit?
Natural gas production in the United States has surged, thanks to innovations and expansions of shale drilling activity. Prices have fallen, and consumption has risen in turn. Though the boom has the potential to affect the broader economy, its impact on the trade deficit has thus far been small. When domestic production of natural gas started to climb in 2006, net imports of natural gas did begin to drop. But the decline in net imports has not improved the trade deficit. Net imports of natural gas are too small a portion of total imports to have that much of an impact.
In the late 1980s, the United States became a net importer of natural gas, as consumption began outstripping domestic production. Since then, the gap between consumption and output has been shrinking, and net imports of natural gas have declined. Domestic output grew roughly 17 percent from 1986 to 1996, and 29 percent from 2006 to 2012. Domestic natural gas now represents a larger portion of the total natural gas consumed in the United States. In 2006, domestic output represented 86 percent of total consumption, and by 2012, it was 95 percent.
When consumption growth was outpacing output growth between 1986 and 2001, net imports were increasing about 10 percent per year on average. When production began to expand faster than consumption in 2006, net imports dropped 11 percent per year on average. Imported natural gas now accounts for only 6 percent of total U.S. natural gas consumption, while it stood at 16 percent of U.S. consumption in 2006.
The decline in net imports of natural gas should translate into a decrease in total imports and an improvement in the overall trade deficit. But the trade deficit does not move in sync with net imports of natural gas over the same period, hinting at the small impact of the natural gas sector. Net imports of natural gas have been falling since 2006, while the trade deficit has improved over only three periods. One of those improvements, in late 2008, was driven by the recession. During another, from 2006 to the start of the recent recession, net imports of natural gas were actually flat. The only instance where net imports of natural gas could be contributing to the improvement in the trade deficit is from May 2012 to the present.
A look at export and import growth since May 2012 shows that the improvement in the trade deficit is due to export growth outpacing import growth. Imports mostly decreased relative to their May 2012 level, and exports fluctuated around their May 2012 level. Many factors could be contributing to the gap in import and export growth. Previous work (see “Behind the Strength in Exports”) shows that long-run factors and the lower level of the dollar relative to other currencies account for current export activity. A sputtering domestic economy can help explain soft import activity, since slow growth is usually accompanied by slower consumption of both foreign and domestic goods.
Although the quantity of imported natural gas declined 4.7 percent per month on average from May 2012 to the present, the total value of natural gas imports represented just 0.35 percent of total imports. In terms of value, natural gas imports averaged $0.79 billion per month over this period, while total imports averaged $226.8 billion. In 2012, the average month-to-month change in natural gas imports was $55 billion, while the average change in total imports was $4.5 billion. Natural gas accounted for only 1.2 percent of the average month-to-month change in imports. Since natural gas represents a miniscule proportion of total imports, any changes in natural gas imports are unable to account for changes in total imports or the trade deficit. Thus far, the direct impact of the shale boom on the trade deficit is hardly visible.