JDT (techfun) wrote in peakoilusa,

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Oil and the Trade Gap

Oil is like a drug. There are always those people who will pay more when the street price of weed goes up. 

The US economy and its oxymoronic Republican doublespeak "Stagnat Recovery" is so heavily based on cheap oil that it can't tighten its belt and cut back on oil consumption even when the prices climb to the highest level in 22 years.  The US trade deficit for June turned out to be higher than expected.  Economists predicted (They might have called Miss Cleo - not sure about that) "just" a 47 billion dollar deficit.  Instead we set a new trade deficit record at 55.8 billion dollars.  A large chunk of this is due to the fact that when crude oil prices increased - instead of cutting consumption - we increased energy imports. 

This is all is going on while the federal government is giving businesses huge tax incentives to buy the biggest of the SUV's on the market.  A full list of the vehicles that qualified as of November 2003 is here:  http://www.bankrate.com/brm/itax/biz_tips/20030403b1.asp.  This was a tax break introduced in the 1980's for construction and farm businesses that had a legitimate need for those large vehicles.

From: http://www.hummerteam.com/news_story.asp?id=56

The tax code now caps deductions for most automobiles. But the largest vehicles -- those that weigh more than 6,000 pounds fully loaded -- are exempt because the relevant portion of the code was written in the 1980s before the rise of the sport utility vehicle and was intended to exempt big pickups needed on work sites. Now the tax incentives also give business owners not involved in hauling work -- doctors, real estate agents, accountants -- more incentive to buy the biggest SUVs instead of smaller ones, or cars.

The proposal "makes a glitch in the tax code much worse and it benefits rich businessmen who want to buy massive SUVs," said Aileen Roder, program director for Taxpayers for Common Sense. "In essence, we're buying these vehicles for these businesses."

But the administration thinks that greater business deductions will be a potent economic stimulant.

How can anyone in their right mind think that tax laws that encourage the purchase of the biggest gas guzzling vehicles - at a time where we are importing more and more oil -  and those imports are widing our trade gap and helping to devalue the US dollar?

Trade Gap Widens, Producer Prices Tame
Fri Aug 13, 2004 09:24 AM ET

By Tim Ahmann

WASHINGTON (Reuters) - The U.S. trade deficit widened much more than expected in June, hitting a record $55.8 billion dollars on the biggest drop in exports in nearly three years and record imports, the government said on Friday.

In a separate report, the government said prices received by producers moved up only slightly last month, suggesting scant inflation pressures at the wholesale level.

Wall Street economists had expected the trade gap to widen, but looked for a deficit of just $47 billion. They said the wider-than-expected gap would lead the government to ratchet down its reading on second-quarter growth, which it had put at a 3 percent annual rate in a snapshot late last month.

"It's extraordinary, I've never seen this big a swing in one month" in the trade deficit, said Kevin Logan, an economist at Dresdner Kleinwort Wasserstein in New York.

The dollar fell broadly after the data, while prices for U.S. bonds rose as traders saw the latest data as suggesting a somewhat slower pace of interest-rate rises from the Federal Reserve than had been expected.

The Labor Department said prices received by farms, factories and refineries rose 0.1 percent in July, after a 0.3 percent fall in June as a spike in energy prices was largely offset by a sharp plunge in food costs. Economists had expected a 0.2 percent gain.

Core producer prices, which strip out volatile food and energy costs, also gained a slim 0.1 percent, as expected.


The trade report, however, came as a shock to Wall Street.

Economists were taken aback by the decline in exports, which fell 4.3 percent to $92.8 billion in June. It was the largest drop since September 2001 and the weakest performance since February.

"Perhaps the most disturbing news would be the deep drop by exports, where the earlier rise in exports supplied important support to the U.S. manufacturing sector," said John Lonski, chief economist at Moody's Investors Service in New York.

At the same time, imports climbed 3.3 percent to an all-time high of $148.6 billion, partly reflecting a run-up in oil prices.


Crude oil prices hit $33.76 a barrel, according to the Commerce Department's measure, the highest price since March 1982. The quantity of crude imported also rose to a record level.

A further increase since June in crude prices, which have hit record levels in recent days amid strong demand and geopolitical tension, was likely to continue to provide upward pressure on imports.

The producer price report showed energy prices climbed a sharp 2.3 percent in July, with gasoline up 5.4 percent on the month and 33.3 percent on the year.

However, food prices shrank 1.6 percent, the largest fall since a 3.1 percent drop in April 2002.

The trade report showed the politically sensitive trade gap with China widened to a record $14.2 billion as exports eased and imports soared to an all-time high. U.S. manufacturers and labor groups complain that Beijing's policy of holding the value of its currency, the yuan, steady against the dollar has given it an unfair trade advantage.

The Bush administration has claimed it is making progress getting China to move toward a more flexible currency regime, but Democrats want to ratchet up the pressure with a trade investigation.

The U.S. trade gap with Mexico also reached a record.

For the first half of the year, the trade gap came in at $287.7 billion, putting it well ahead of the same period last year and on track to break last year's record $496.5 billion.

© Copyright Reuters 2004. All rights reserved. Any copying, re-publication or re-distribution of Reuters content or of any content used on this site, including by framing or similar means, is expressly prohibited without prior written consent of Reuters.

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