Opportunity cost is perhaps the most important concept in all of economics. Every country has a production possibilities frontier, which reflects its stock of production factors as well as the institutions underlying its economic system. At full employment, producing more of one kind of good generally means forgoing the production of other goods.
The Economist has a good piece on the extraordinary success of the US energy industry. Over the past fifteen years, the US has grown from a major energy importer to a major exporter. We are now the largest producer of both oil and gas in the world. Only part of the article seems to be mistaken:
Long a major importer of oil, America’s need for foreign crude began to decline in 2008 – just as the oil shale fields were really taking off. In 2019, the country exported more energy than it imported for the first time in more than half a century (although it produces more than it consumes domestically, it still imports large amounts of oil because it needs certain types that are only produced abroad produced). Last year, America posted a net energy surplus of about $65 billion.
Shale has boosted U.S. growth in several ways. In a sense, the decline in imports and the increase in exports have improved America’s trade balance: in most other sectors, America buys more from the world than it sells to the world.
Our trade balance fluctuates around 3% of GDP and does not appear to be improving significantly:
The current account balance represents national savings minus domestic investment. It is not clear why energy exports would boost that balance. If the fracking boom leads to more domestic investment in oil equipment, it would cause the trade deficit to widen even bigger. More likely, the energy boom had little impact on our trade balance.
But the energy boom certainly had a major impact on the trade balance for the energy sectorwhich went from a deficit of more than $370 billion in 2008 (2.5% of GDP) to more or less balanced trade in 2023. (According to this source. The Economist claims a surplus of $65 billion.)
If our energy trade deficit has largely disappeared, why has the overall trade balance deteriorated 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 the manufacturing sector has borne the brunt of rising US energy production, which explains why the overall trade deficit has not improved significantly:
Voters should be skeptical of any politician who proposes to achieve the following two goals:
1. Much higher energy yield.
2. Increased production of manufactured goods.
If they succeed at the first goal, they will likely fail at the second goal.
P.S. The current account deficit is slightly smaller than in 2007-2008, expressed as a percentage 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.