The Impact of US Energy Policy on the Balance of Trade

Gal Hochman
Assoc. Prof., Dept. of Agriculture, Food & Resource Economics
Rutgers University (New Brunswick, NJ)
Ella Segev
Lecturer, Dept. of IE&M
Ben Gurion University of the Negev (Israel)

Geoffrey Barrow
Graduate Student, Dept. of Agriculture & Resource Economics
University of California, Berkeley
David Zilberman
Professor, Dept. of Agriculture & Resource Economics
University of California, Berkeley

It is a common perception that US energy policy is driven by energy security and climate change concerns. Fuel security means reduction of dependence on unreliable supply of fossil fuels, whereas climate change means switching away to strategies and fuels which will reduce greenhouse gas (GHG) emissions. The US emphasize reduced GHG emission by tightening the CAFE standards, subsidizing electric cars, imposing environmental regulation that lead to reduction of use of coal in power plants (in April 2012 EPA released a draft that called for any new power plant to reduce GHG emissions to levels of “state-of-the-art, combined cycle natural gas plant”), and biofuel policies - including the Renewable Fuel Standard and Low Carbon Fuel Standard (the former is a volumetric mandate, the latter is a GHG standard for transportation fuels). The US government also allowed further expansion of Fracking, which led natural gas prices to plummet and replace coal and nuclear in electricity production as well as diesel and gasoline as vehicular fuels (in trucks, buses, taxis, etc).

All these activities are consistent with reduction of the dependence on foreign oil suppliers and on the GHG emission reduction, but there is another side effect that suggests a stronger motive: improving balance of trade. When the US is reducing consumption of domestic coal, it is not shutting mines and reducing production; it is increasing export of coal to Europe (while in 2000 the US exported 0.9 million short tons to Germany, in 2011 it was 4.8). When we reduce gasoline consumption due to improved gas mileage or ethanol, we do not shutdown refineries; we export gasoline to Europe. So the US emission have not declined; they are simply being emitted somewhere else. In exchange, however, the exported coal and gasoline are sources of foreign currency inflows. We figured out that from 2000 to 2012 the combined effect of biofuel, fracking, conservation and exports of coal and gasoline on the US balance of trade was more than 170 billion dollars of gain, reducing the trade deficit significantly (which was $540.4 billion in 2012).

The petroleum industry is a multiproduct process, whereby gasoline and diesel are derived from crude oil together with other petroleum products. It is a capital-intensive multiproduct process, such that once a refinery is configured and the capital investment made short-term decisions are constrained by existing technologies. Because it is difficult to change the petroleum refinery capacity, access to international markets matters. Without trade, the introduction of an alternative to gasoline reduces gasoline supplies, but also reduces the production of other petroleum products. However, the decline in production is mitigated when the commodity is a traded commodity and diverting production to exports does not entail large transaction costs.

A second result of our analysis is that if the alternative does not replace the petroleum product then prices decline, resulting in a rebound effect whereby the introduction of the biofuel reduces fuel prices and this reduction in fuel prices leads to an increase in total fuel consumption. However, this effect is substantially smaller than that computed in previous studies that assume competitive behavior. A third result is that without trade the fall in supply of fossil fuels affects production of other petroleum products that, in most cases, emit greenhouse gases at higher per unit rates than gasoline and diesel; namely, the indirect co-product effect.

We assessed the models predictions and simulated the introduction of ethanol. The numerical simulation suggests that the introduction of ethanol into the gasoline market in the US caused fuel prices to decline by about 3% / 2.5 US$ per barrel of gasoline. In our simulated example the introduction of ethanol reduced exports from OPEC countries but increased domestic consumption in those countries. Further, market power, both in the upstream and downstream market, plays a significant role in determining the rebound effect. In addition, lower demand elasticities (a move toward more efficient light vehicle fleet) or ethanol technologies that are more scalable thus yielding more elastic ethanol supply function, results in higher displacement of gasoline by ethanol and to a lower rebound effect.

When looking at the data, we see that the domestic petroleum industry responded to changes in demand and supply by reducing imports and increasing exports. While in 2005, the US consumed 3,343,131 thousand barrels of finished motor gasoline annually, in 2011 US consumption of finished motor gasoline declined to 3,194,754 thousand of barrels annually. That is, the amount of ethanol consumed in the US in 2011 equaled 67.25% of the decline of finished motor gasoline consumption. Further, imports of gasoline declined substantially. The introduction of ethanol resulted in the US saving almost 100 billion US$ in currency outflows.    

Similarly, the coal industry responded to the introduction of hydraulic fracking and natural gas not by reducing production but by increasing exports: while historically the US was a net importer of coal and in 2007 net imports equaled more than 3000 MMBtu, in 2012 the US became a net exporter of coal exporting 837 MMBtu to the rest of the world (Figure 1).

Figure 1


Further, coal production in the US is relatively stable during the same period (Figure 2).


Figure 2


In sum, our work shows that although US energy policy is driven by energy security and climate change concerns, there is a strong side effect on cash outflows and the US balance of trade.









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