$50-a-Barrel Oil Is a Problem for US Trade Deficit

Here's an economic truth that fossil fuel detractors rarely talk about: The US oil industry has done more to reduce its country’s trade deficit than any other.

Thanks to geological luck, engineering prowess, and shrewd capitalism, the shale revolution turned what two decades ago was a nearly $400 billion-a-year oil trade deficit into a $45 billion surplus in 2024. Now, President Donald Trump, in theory the champion of “drill, baby, drill,” risks killing it.

The White House is pushing oil prices toward $50 a barrel, and perhaps even lower if you believe – difficult as it is – what US trade czar Peter Navarro says. As oil prices plunged 17% in a week, US Treasury Secretary Scott Bessent was on television cheerleading the crash. Part of the decline is the collateral damage from the tariff drama of recent days, but the White House’s fingerprints are all over the other part: diplomatic pressure on OPEC+ to increase output.

The Trump administration seems to be motivated by a desperate attempt to cushion the inflationary impact of the trade war with cheap oil. Yet, $50-a-barrel will have another macroeconomic consequence: widening the trade deficit that Trump wants to reduce. Drill, baby, drill doesn’t work at $50-a-barrel – and if the US doesn’t drill, it must import.

On Wednesday, West Texas Intermediate touched a four-year low of $55.12 a barrel, only to recover to around $60 a barrel after Trump made a U-turn in the trade war. Still, a lot of the damage is done.

To understand what’s at stake, it helps to go back to 2008, during the second term of George W. Bush. The US trade deficit was running then at about $800 billion a year. Nearly half of that - $386 billion, to be precise – corresponded to the imbalance in petroleum trade. The enormity of the petroleum trade deficit becomes clear if one thinks about it as a country. Measured as such, it was nearly as large as the US-China deficit has ever been.

With domestic production dwindling, the country imported, on a net basis, more than 11 million barrels a day of crude and refined oil products. As Bush famously put it, America was “addicted” to foreign oil.

Then came the shale revolution.

American wildcatters spent years experimenting with ways to crack a new source of petroleum: shale formations. To the untrained eye, they look like a tiramisu, with thin layers of productive but very hard-to-crack rock sandwiched between non-productive ones. By the mid-2000s, engineers had found a way to tap the riches: drill vertical wells several miles deep into the tiramisu, and then turn the bit around 90 degrees to proceed horizontally — nowadays as far as 20,000 feet – or 6,000 meters. Those L-shaped wells reached deep into the productive stratum. Then began the hydraulic fracturing, or fracking — water, sand and chemicals were blasted deep underground to free oil from the hard-to-crack shale rock.

What followed was a gusher. US total oil production – including crude, condensates and other liquids -- boomed, rising to 20.1 million barrels a day last year, up from 6.7 million in 2008. Alongside, oil imports collapsed. The 11 million barrels a day of net oil imports during the late Bush presidency turned into net exports of more than 2 million barrels a day by the time Joe Biden left the White House.