US Trade & Oil

The global leading economic indicators have been signaling a "V"
shaped recovery since early 2009. Still, it is a mild surprise to
observe how strongly US trade accounts have responded and in so
timely a manner. Since both imports and exports substantially
overshot the weakening of the US economy in early 2008, It has
been tempting to think trade would undershoot in the early days
of recovery. Not so.

Owing perhaps to cumulative dollar weakness plus the more nearly
synchronous nature of this cycle, US exports have increased at a
26% annual rate since last spring and clearly represents the
strongest of major US output sectors.

Imports have also accelerated off the spring '09 low and have been
especially strong in recent months reflecting higher oil and fuels
prices.

Surely, part of the strength in each category reflects inventory
pipeline refilling, but the joint progress has been dandy enough to
allay fears of broad based protectionism which can dog a deep
global downturn. So far, so good.

There may well be an issue going forward concerning the
composition of US imports. The US is early in recovery, but the oil
price is already running at a high level. If the oil price trend
continues, it may divert consumer spending away from non-fuel
goods and services, which could negatively affect non-fuel
exporters. In the same vein, you have to remember that sharply
higher oil prices will pressure profit margins of oil-dependent
exporters such as China and India.

So, one issue regarding the recovery of global trade and broader
recovery for that matter will be how well OPEC and the non-OPEC
national companies manage oil prices. Looking back to 1970, the
record has been dismal, with intermittent booms and busts in
price. Since the supply picture has improved significantly in
recent years, OPEC / NOCs have the capability to provide better
supply / demand balance over the next few years if they are
smart about it. Since the track record of oil price management
has been disastrous since control passed from the "seven sisters"
to the present cartel, experience indicates oil and gas price
management going forward should remain an area of concern for
both advanced and emerging economies.