Thursday, December 28, 2006

Oil and the Trade Deficit

In an earlier post, I speculated that the US trade deficit is largely due to the increasing price of oil. I found this report by the Federal Reserve Bank of San Fransisco which bears out the claim, demonstarting that about 50% of the increased trade deficit is due the higher cost of oil. Interestingly, the article also predicts that in the near the future, US companies should move to more energy efficient production, which will both help the environment and reduce our trade deficit.

In addition, I made a graph that shows monthly changes in oil price and trade deficit over the past decade, and the relationship between the two. While correlation is not causation, the data clearly support the idea that the price of oil influences the trade deficit.

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