Trade Deficits, Energy Independence and, Oh Yes, CO2 Emissions

Our trade deficit with the rest of the world widened in September to $36.5 Billion, more than was expected.  Oil prices, a weak dollar and a rising deficit with China were viewed as the culprits. To the extent the trade deficit widens it reduces the growth of GDP. So economists are lowering their growth rate numbers for the third quarter and shaving numbers for the future as well. With President Obama’s trip to China in the news, journalists and others have jumped on the “undervalued” Chinese currency as a systemic problem that China must correct to solve the US’s trade problems and maybe those of the rest of the world as well.  It is highly unlikely, in my view, that a rise in the value of the yuan would do much beyond shifting the manufacture of some of the goods the Western world is buying from China to other Asian countries. I also think those countries, which already have strong trading relationships with China, would remain within the Chinese supply chain.  Nominally, our trade deficit with China might shrink, but it would rise with the other lower cost countries within the Asian sphere that are increasingly an integrated  part of the new center of manufacturing for the world. Of course, in the short term, deficits would rise as US companies would not easily shift from the established supply chains they have which are working well. Some combination of profit margins falling and prices rising on finished goods would be the more likely result.

So let’s, instead, turn to something that we control that would over time reduce our trade deficit—eliminating imported oil. I wrote about this in my post “Our Mileage Standards Are a Joke,” but let’s do it again with some refinement.  I apologize for all the numbers but we have to deal in facts if we want to get to a solution:

We are still importing close to 10 million barrels of oil a day, about half from OPEC (with Saudi Arabia and Venezuela the biggest), a fourth from Canada and a little more than 10% from Mexico. We have about 240 million cars on the road traveling about 3 trillion miles a year, consuming 4 billion barrels of gasoline or about 11 million barrels per day. At a scrappage rate of 4.5% a year we will have a new fleet of cars on the road in 20 years.  By the way, the current rate of new car sales is about equal to the scrappage rate.  We aren’t adding to the fleet. If we pushed our mileage standards up to get us to 55 miles per gallon on new cars in 20 years (which is where the rest of the world is going already), our usage would only be 5 1/2 million barrels per day on its way down every year after that as continued scrappage eliminated the lower mileage vehicles. Given what we are seeing already from the new start-up car companies and Ford and GM I think we could blow those standards away. I also think scrappage would accelerate if there was a real breakthrough in miles per gallon on a broader class of new cars.  The eVolt gives us a hint of what could happen.

So what about the trade deficit?  Well, the reduction of 5.5 million barrels per day of oil equivalent at, say, $70 per barrel (pick your price) is a $140 Billion annual reduction in imported oil. That is giving no credit for exports of the technology created to meet these mileage standards if the US government truly supports the development of these technologies within this country. The ARRA and DOE grants to new vehicle and battery companies are a start.  It also gives no credit for a possible share gain by US based auto manufacturers as the new technologies grab hold.

And CO2 emissions? A little more problematic a calculation since it depends on what gets one to 55 miles per gallon.  The simple calculation is the elimination of 83 billion gallons of gasoline at 20  pounds of CO2 per gallon or about 830 Megatons of CO2 per year.

Certainly, this is not the only thing we can do to reduce the trade deficit, but it provides a partial solution to existing geopolitical, economic and climate change problems that we don’t really seem to be addressing.

This entry was posted in Trade, United States and tagged , , , , , , , , by Jack Rivkin. Bookmark the permalink.

About Jack Rivkin

Jack Rivkin retired in 2008 as EVP, CIO, Head of Private Asset Management of Neuberger Berman(NB) and from NB's Executive Management Committee. He was also on the Lehman(LB) Council on Climate Change(CC) and the NB CC Fund Advisory Board. He has been engaged with the United Nations and other entities on policy issues related to Private Capital and CC. He is an Associate Fellow of the Asia Society. He has continued on the NB Mutual Fund Board and with his CC responsibilities. He began his investment career in 68 as an analyst at Mitchell Hutchins(MH), and became Director of Research(DOR) there. After Paine Webber(PW) acquired MH, he served as DOR; CFO of PW; CEO of PWMH-the equity trading and investment arm of PW; Chmn of MH Asset Management and President of PW Capital. 87-92 he was DOR and, subsequently, Head of the Worldwide Equities Division of LB. 93-95, he served as a Vice Chairman and DOR at Smith Barney (now Citigroup). He was an EVP with Citigroup Investments 94-01, responsible for private equity investments. He was also an adjunct professor at Columbia University teaching a course in Security Analysis. He joined NB in 2002. He is the co-author of “Risk & Reward—Venture Capital and the Making of America’s Great Industries,” Random House, 1987. He is a regular guest on various media. He is the principal subject in a series of Harvard Business School cases describing his experience as DOR and Equity Head at LB. He has served as a director of a number of private companies and the NYSSA. He is currently a director of Idealab, Dale Carnegie, Operative, World Policy Institute and other private companies. He is a member of the Economic Club of NY, the Anglers Club, Theodore Gordon Fly Fishers, and a lifetime member of Trout Unlimited. He continues to be an active private equity investor when he isn’t fly fishing. Mr. Rivkin earned his Professional Engineering degree from the Colorado School of Mines and his MBA from the Harvard Business School

2 thoughts on “Trade Deficits, Energy Independence and, Oh Yes, CO2 Emissions

  1. Public policy subsidies for electric car creation is easy to sell from either the right or the left side of the aisle. Green enthusiasts can marvel at the potential for lowering CO2 emissions. Military Hawks can tally up al the billions of $ that won’t be going to the Mid-East, Russia, and Venezuela.
    In short, someting big, for everyone

  2. Pingback: One Million Electric Vehicles by 2015? Well, It’s a Start. | ContraCarbon

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