Merry go round. Credit Shutterstock
According to research by the Cologne Institute for Economic Research (Institut der Deutschen Wirtschaft Koeln) energy imports should not be “understood as a threat to the security of energy supply and an economic disadvantage” per se. The study – “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes – finds that conclusion simplistic and points out that energy supply security mainly depends on open (liberalized) and integrated markets.
For the purpose of this article, the study’s second conclusion – i.e. “Germany benefits from the income of oil countries” – is more interesting because it may help limit use of the populist term ‘energy independence’ during the upcoming 2016 US presidential campaign trail. What the US should strive for instead is a healthy energy self-sufficiency – a path the US is already well on thanks to the US shale revolution. The chart below illustrates this as the dramatic increase in US shale and tight crude oil production resulted in a steady decrease of crude oil imports to the US Gulf Coast, particularly for light-sweet and light-sour crude oils. These are the same grades of oil US refiners used to import from West Africa – Angola and, above all, Nigeria.
Source: EIA
Nigeria has seen its oil exports to the US tumble from historical highs to almost nothing.
Before the precipitous decline in oil prices that started in June 2014, rising oil prices as well as increased demand for oil due to economic growth – coming especially from Asia – led to oil windfall revenues in oil-exporting countries. This oil boom, the study explains, led some oil exporting countries to significantly beef up investment. The study highlights the German case: “The German economy and especially the capital goods manufacturers benefit notably from this development. In recent years, around 7.5 per cent of all German exports of capital goods were attributable to oil countries. (…) In particular, the importance of oil countries for German trade surpluses with capital goods has more than doubled in a comparison between 2008 and the 1990s. Most recently, around 17 per cent of this surplus was realised with oil countries. (…) Nominal gross investments in the oil-producing countries have increased six-fold, from just under 240 billion US dollars in 2000 to over 1,450 billion dollars in 2013.”
The following charts – created by the Cologne Institute for Economic Research – bear this out.
Oil-Producing Countries as Investment Sites
Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes.
Oil-Producing Countries and Germany’s Foreign Trade
Share of oil-producing countries (1) in Germany’s exports and net exports (2) and capital goods (4), as a percentage
Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes.
Oil-Producing Countries Purchase Industrial Machinery ‘Made in Germany’
Source: Cologne Institute for Economic Research
Admittedly, the German case is unique in a sense because Germany’s economy is highly export dependent or “internationalized” to use the term in the study. Exports and imports make up 48.8 per cent of GDP – by far exceeding other highly developed and efficient industrial countries, in particular the US. Peter Hintereder and Martin Orth nicely summarize what the German economy is all about: “The German economy focuses on industrially produced goods and services. In particular German mechanical engineering products, vehicles, and chemicals are highly valued internationally. Around one euro in four is earned from exports and more than every fifth job depends directly or indirectly on foreign trade.” In contrast, the US economy is often described as a consumer-dependent economy, in which consumers, for example, tend to benefit from lower oil prices, which has only an impact on the overall US economy if the premise holds that consumers spend the money saved at the pump immediately – and don’t save or use it for paying down debt.
Level of Openness of Selected Large Industrialized Countries in Comparison
Source: Cologne Institute for Economic Research, “Does Dependency Equal Vulnerability? Energy Imports in Germany and Europe” commissioned by UPEI et alia and authored by Hubertus Bardt, Esther Chrischilles, Michael Grömling, Jürgen Matthes; For the full text of the study in German read here.
In sum, even though higher oil prices are perceived as a drag on overall economic activity while the current low oil price environment is often considered a boon, the authors of the study cite additional research to suggest that in the higher oil price environment “the so-called trade effect can produce a positive counter-effect” for the oil importing country. Conversely, sustained lower oil prices may have a negative impact on investment-driven capital goods purchases from oil-producing countries – many with insufficiently diversified economies. It is therefore essential to understand the exact nature of the trade relationship between two countries before unequivocally calling for the end of oil imports from certain countries; namely, whether – first – a windfall in oil revenues in oil-producing countries is likely to increase investments in those countries and – second – whether the domestic economy of the energy importing country is in a position to benefit in terms of international trade from such an ensuing increase in demand for (capital) goods in the oil-producing countries.
Finally, a brief look at the US-Saudi trade relationship illustrates that energy trade is not necessarily a one-way street in economic terms.
According to the latest CRS report on Saudi Arabia – published in January 2015 – Saudi Arabia remained the largest US trading partner in the Middle East in 2013. Citing data from the US International Trade Administration, Saudi exports to the US in 2013 totaled about $51.8 billion while US exports to Saudi Arabia were valued again higher year-on-year at about $18.9 billion. The CRS report also provides the latest trade figures: “[t]hrough September 2014, Saudi exports to the United States were valued at $38.7 billion” with the reverse trade valued at $13.3 billion. Interestingly, the report notes that “[t]o a considerable extent, the high value of U.S.-Saudi trade is dictated by U.S. imports of hydrocarbons from Saudi Arabia and U.S. exports of weapons, [industrial] machinery, and vehicles to Saudi Arabia. (…) Efforts in the United States to produce more oil domestically have lowered U.S. imports of oil overall and contributed to conditions in international oil markets that have put downward pressure on oil prices. Declines in global oil prices are thus likely to have a pronounced effect on the value of Saudi exports to the United States.”
Note, many US companies are well positioned to supply the “fastest-growing non-oil industrial sectors” such as power generation; gas and water equipment/services; transport and communications; and construction going forward. However, most of these sectors depend on government funding and as Joseph Ayoub of the EIA observed: “If oil prices remain low for an extended period and spending levels remain similar to recent history, Saudi Arabia will continue to run a budget deficit. Even with the SWF, Saudi Arabia’s ability to grow, strengthen, and even diversify its economy depends on a steady stream of revenue from the sale of this oil over the long term.” Additionally, in light of the Cologne Institute study it could be argued that it actually may be in the US national interest to continue importing some oil and present itself as reliable trading partner and ally. Saudi Arabia seems to be very fond of US weapon systems with “proposed major US defense sales to Saudi Arabia” in the period between October 2010 and October 2014 reaching over $90 billion. This should not come as a big surprise given the contours of a potential clash with Iran for regional supremacy in the near future. More oil revenues are needed to upgrade those weapon systems and benefit the US defense sector.
Source: EIA
