Shale Revolution: Trade Deficit Slides - Analyst Blog

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In October, the trade deficit declined to $40.3 billion from the upwardly revised figure of $43 billion for the month of September. Particularly notable was the fact that exports of goods and services increased by 1.8% to a record monthly high of $192.7 billion. This was an 18% increase from September figures. On the other hand, imports increased only by 4.5%, to $233.3 billion.

Increase in Global Demand

The decline in the level of deficit indicates that the global economy has turned the corner. Shipments to both Europe and China increased appreciably. Only exports to Japan remained largely static, while imports increased.

Exports for nearly all product categories increased from the previous month. These include consumer goods -- mostly jewelry, capital equipment, soybeans and corn. However, it seems the overall increase in exports was primarily fueled by an increase in the export of petroleum products.

Petroleum Exports Surge

Oil exports increased by 11% in October, after adjusting for inflation, to $7.7 billion. On the other hand, petroleum imports increased by only 1.5%, to $18.2 billion. There has been a 9.3% increase in exports of petroleum products for the first 10 months of 2013, compared to the same period last year.

Then again, imports have decreased by 11.1% during the same period. This decline is primarily a result of a fall in global prices. The surge in petroleum exports in particular has meant that through October, the trade deficit was 10.6% lower than last year. This was a result of a 2.7% increase in exports as well as the fact that imports remained virtually unchanged during this period.

Shale Revolution

The existence of abundant reserves of natural gas trapped within shale rock was known even earlier. New methods of extraction such as horizontal drilling and hydraulic fracturing ("fracking") have provided access to shale reserves which were earlier inaccessible. More importantly, they have also lowered associated costs

Some of the leading players in the U.S. shale arena are Chesapeake Energy Corporation ( CHK ), EOG Resources, Inc. ( EOG ) and Chevron Corporation ( CVX ).  Anadarko Petroleum Corporation ( APC ) and Devon Energy Corp ( DVN ) are other major producers.

A Lasting Impact on Exports

This week, the Energy Information Administration (EIA) said the U.S. is expected to produce 9.6 million barrels of crude oil per day by 2016. This level was last achieved in 1970. However, crude oil production is expected to flatten and ultimately decline after 2020.

However, the EIA said the production of natural gas will continue to increase. Natural gas production is expected to rise by 56% between 2012 and 2040.  Earlier this year, the Department of Energy cleared plans for a natural gas terminal at Cove Point on Maryland's Chesapeake Bay. The terminal will cost an estimated $3.8 billion and will export .77 billion cubic feet of natural gas per day to Japan and India.

Benefits Outweigh Costs

The terminal is the fourth facility being built to export LNG to countries with which the U.S. does not have a free trade agreement. In May, the Obama administration had provided approval to a $10 billion facility in Texas known as Freeport LNG. Through these approvals, the Department of Energy has clearly indicated that the benefits from such exports exceed the possible costs.

There are some concerns that excessive exporting of natural gas may result in a hike in domestic prices. There are also concerns about the extent of global demand in the future, since the likes of China are gearing up to increase production. However, it is clear that shale gas has had a beneficial impact on the trade balance. Therefore, for the present, its benefits seem to outweigh the costs presently, at least in this regard.



ANADARKO PETROL (APC): Free Stock Analysis Report

CHESAPEAKE ENGY (CHK): Free Stock Analysis Report

CHEVRON CORP (CVX): Free Stock Analysis Report

DEVON ENERGY (DVN): Free Stock Analysis Report

EOG RES INC (EOG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: APC , CHK , CVX , DVN , EIA

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