Opportunity cost is arguably the most important concept in all of economics. Each country has a production possibilities frontier, which reflects its stock of factors of production, as well as the institutions that underlie its economic system. When at full employment, producing more of one type of good generally means forgoing production of other goods.
The Economist has a good piece on the extraordinary success of the US energy industry. Over the past 15 years, the US has gone from being a major importer of energy to a major exporter. We are now the world’s leading producer of both oil and gas. But one part of the article seems mistaken:
Long a major importer of oil, America’s need for foreign crude started to decline in 2008—just when its oil-shale fields really took off. By 2019 it was, for the first time in more than half a century, exporting more energy than it imported (although it produces more than it consumes domestically, it still imports vast quantities of oil because it needs some varieties only produced overseas). Last year America recorded a net energy surplus of about $65bn.
Shale has boosted American growth in several ways. Narrowly, the decline in imports and increase in exports has improved America’s balance of trade: in most other sectors America buys more from the world than it sells to it.
In fact, our trade balance has fluctuated around 3% of GDP, and doesn’t appear to be significantly improving:
The current account balance represents national saving minus domestic investment. It’s not obvious why energy exports would provide a boost to that balance. Indeed if the fracking boom led to more domestic investment in oil equipment, this would tend to make the trade deficit even larger. More likely, the energy boom probably had little impact on our trade balance.
But the energy boom certain did have a big impact on the trade balance for the energy sector, which went from a deficit of more than $370 billion in 2008 (2.5% of GDP) to roughly balanced trade in 2023. (According to this source. The Economist claims a surplus of $65 billion.)
If our energy trade deficit has largely disappeared, then why has the overall trade balance worsened in recent years? The concept of opportunity cost suggests that more energy production means less production of other types of goods. Research by Ehsan Soltani suggests that manufacturing sector has born the brunt of rising US energy output, which explains why the overall trade deficit has not significantly improved:
Voters should be skeptical of any politician that proposes to accomplish the following two goals:
1. Much higher energy output.
2. Increased manufactured goods output.
If they succeed at the first goal, they will probably fail at the second goal.
PS. The current account deficit is a bit smaller than in 2007-08, as a share of GDP. But those years were distorted by extremely high oil prices, which peaked at $147/barrel. Most of the growth in US domestic energy production occurred after 2010.
