Oil and its products comprise some of the key commodities and products for any economy from their crucial role in energy supply. In addition, oil has been a commodity whose sourcing, production as well as marketing has being of great concern to many economic stakeholders as energy is one of the key drivers of economic growth and development. In addition, oil has been at the centre of governments’ policies focus as countries seek to secure supply and enhance production as well as tap the benefits that come with the precious commodity. In that respect, this analysis seeks to establish the effect that oil production and consumption has in an economy specifically to the balance of trade as well as its price’s relation to a country’s currency. To achieve the objective, the analysis starts by providing a background to the oil and its industry then explaining the production of the commodity in US. Further, the analysis provides an overview of the commodity’s consumption in US as well as an overview of its balance of trade in the country. Finally, the effect of the commodity’s production, consumption and trade balance as well as its price are analyzed in respect to their relation to the US dollar.
Oil’s background
- Overview
Oil is one of the key commodities whose global use is massive with the Oil and Gas industry providing 60% of the daily energy consumption by the 6.9 billion people in the world. In addition, Oil has several products hence diverse uses which include electricity generation and heating fuels, transportation fuels, road oil and asphalt, and as feedstock in making of synthetic materials, plastics as well as chemicals. (Delloitte, 2013b)
- History
The oil industry is one of the oldest industries and has developed to be crucial globally and whose control has been an occupation of major economies. In that respect, the Organization of Petroleum Producing Countries (OPEC) was established as a cartel between the Middle East oil producing countries which marked the major source of oil. The organization’s mandate was to control the production and pricing of the commodity from the region. The development had a severe effect on developed countries like the US with an example of the crisis that resulted during the 1979’s Oil embargo. In response, the countries resorted to sourcing for alternative source of oil both locally and in other international fields. (Ernst & Young, 2013b)
- Trends
With the increasing demand for energy as economies seek to accelerate their growth while others emerge as fast developing economies, more pressure has been put on oil production and exploration. In this respect, oil producers and source countries have resorted to extensive exploration and increased production with application of new technologies and innovative methods like the hydraulic fracturing. On the other hand, the increasing environmental concerns with regulators seeking to mitigate against further environmental pollution and degradation is resulting to a search for alternative source of energy in terms of clean energy like wind power, bio-fuels as well as nuclear energy hence hydrocarbons like oil gradually losing significance as the only key source of energy. The industry has also been marked by discovery of unconventional Oil like the light tight Oil through application of innovation by explorers and producers. (Ernst & Young, 2013a)
Oil production in US
- Overview
US had an estimated total oil production of 11.10 million barrels per day in 2011 ranking position three in the world which was an increase from the 2010’s 10.45 million barrels. (US Energy, 2013) With a great need for more energy, the country resulted to increased exploration of oil locally and internally an effort that has bore results with increased local discoveries and production. The country has had producers being conservative in exploration and production in the run to 2012. However, major discoveries have sparked increased investments and exploration increasing US Oil production in 2012 to a level where US was the leader in new production’s growth. This was credited to the discovery of light tight Oil that have seen the country turn around the Oil production and clear the notion that US Oil reserves were experiencing a massive decline. Further, the production is expected to increase with more investments and new productions with a projection of US surpassing Saudi Arabia’s production by the year 2020 to become the world’s largest Oil producer. (Ernst & Young, 2013a)
- Trends
Increasing oil production in US is having a significant effect on the economy besides promoting industries growth. Among the effects setting new trends in the market is the increase in demand for labor as producers seek to increase their production by establishing more production lines. The labor demand is however met by a shortage of skilled labor hence a current surge in wages in the industry. The increased exploration is also attracting new investors into the country as they seek to benefit from the new resources’ discoveries. (Delloitte, 2013)
Oil consumption in US
- Overview
US is the number one consumer of oil in the world with an estimated consumption of 18.56 million barrels in 2011 which was a reduction from the 2010’s 18.95 million barrels. The reduction can be credited to the increased reliance of alternative clean energy which is the growing trend in the global market as innovation and technological advance make possible the production of renewable and carbon free energy including the bio-fuels, wind power as well as the nuclear power. (US Energy, 2013)
- Trend
With a decrease in oil’s popularity as the key source of energy and the increased campaign for adoption of clean energy, consumption of Oil in US has been on the decrease and is expected to continue with the trend as cheaper and clean sources of energy come into the market. (Rival, 2013)
US Oil trade balance
- Overview
US economy’s trade balance operates in deficit which means that the total goods’ exports exceeds imports; a trend that is also prevalent in the Oil trade with its export falling short of the imports as a result of Local consumers’ preference for cheaper and high quality imported oil. However, the country is currently experiencing an overall trade deficit’s decline with a significant portion being credited to an improved oil trade balance. US narrowed its trade deficit to the smallest level in three years in December 2012 to $38.5 billion which was a 20.7% shrink from the previous deficit of $48.6 billion in November 2012. This decrease was a result of increased Oil export as well as a decrease in the commodity’s import. In addition, Oil import was at its lowest level in 16 years hence narrowing the oil trade deficit to its lowest point since the year 2009. (Raval, 2013)
- Trend
With increased production that has been enhanced by new reserves’ discoveries as well as increased production through application of innovative methods like hydraulic fracturing combined with discovery of unconventional oil, US is producing more Oil than it can consume. Therefore, producers are seeking to benefit from the increase by increasing export; a trend that has been marked by several producers applying for more export licenses as their production increases. In that respect, it is expected that US Oil trade deficit will continue to shrink with increased exports and declining imports. (England, 2013)
Oil price and US dollar
- Relation
A country’s exchange rate has an impact on its goods price on the international market while the goods prices have an effect on their attractiveness to the international market hence an impact on the local currency’s value. Thus, with Oil being a significant commodity in the US economy and especially in international trade, its price has a significant relation with the US dollar. (Barron & Lynch, 1989)
Therefore, a decline in US Oil prices would increase its exports while decreasing its imports owing to its attractiveness to both local and international consumers. This would have an effect of an increase in its export accompanied by a decrease in imports which would result to an increased demand for the dollar by the international customers as the commodity is priced in dollars. An increase in dollar demand and the decrease in demand for foreign currencies by local consumers would result to an appreciation of the dollar relative to the foreign currencies. (Frank & Bernanke, 2001) In those considerations, there is a clear illustration of an inverse relation between the oil price and the dollar value. Thus, as the Oil price rises, the dollar loses its value (depreciates) and as the price falls, the dollar appreciates against the foreign currencies. (Barron & Lynch, 1989)
- Trend
Thus, with expected increase in production of Oil in US which exceeds consumption as well as pushing its price down in addition to imports shrinking with local consumers opting for locally produced cheaper Oil, the commodity’s exports are expected to exceed the imports hence a further decline in the Oil trade deficit and eventually a realization of a positive trade balance. This would therefore mean that there would be an increase in demand for US dollars hence its appreciation in the future. (Frank & Bernanke, 2001)
Conclusion
In conclusion, the analysis has clearly indicated that the US is experiencing an increase in Oil exploration and production despite the notion that had been in the market of a looming decrease in its Oil reserves. US Oil production hit a high in December 2012 and its increase in export accompanied by a reduction in imports reduced the country’s goods trade deficit as its deficit significantly declined to a 16 years lowest. In addition, the relation between the Oil price and the US dollar has been explained in that Oil is a key commodity in international trade whose exports and imports significantly affects the dollar’s demand and value relative to the foreign currencies.
Works cited
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uphill battle.” Web. 04 April 2013a.
Ernst & Young. “Oil & Gas: meeting future energy demand.” Web. 04 April 2013b.
Frank, R. & Bernanke, B. Principles of Microeconomics. New York: McGraw-Hill/Irwin,
2001. Print.
Raval, A. “US trade deficit narrows thanks to Oil.” Financial Times, 08 February 2013.
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