The U.S. trade deficit grew to $57.2 billion in October, a 1.1% increase from $56.5 billion in September. Imports fell 1.3% to $208.9 billion, but exports fell even further, dropping 2.2% to $151.7 billion – the lowest level since January.

On reason for the reason for the larger deficit was more lopsided trade with China. The trade gap with China increased to a record $28 billion, up from $27.8 billion in September. China last year supplanted Canada as the largest source U.S. imports. Since joining the World Trade Organization in 2001, China has also emerged as the fastest growing major export market for U.S. products.

A record amount of oil imports also sent the deficit soaring, offsetting a significant decline in crude prices. Petroleum import prices fell 25.8%, with the average price for a barrel of crude tumbling by $15.56 a barrel to $92.02. However, that decline was negated by a record-high 70.9 million-barrel increase in oil imports. The sheer increase in the volume of imports drove the U.S. oil bill up by 3% to $37.7 billion.

Trade was also dampened by a resurgent dollar, which made U.S. products more expensive to foreign markets. The dollar surged 17% from mid-July to the end of November, reaching its highest level in three years on Nov. 21, Bloomberg reported.

“Trade is going to be a significant drag on fourth-quarter growth,” Dean Maki, co-head of U.S. economic research at Barclays Capital Inc., told Bloomberg. “The slowdown in foreign demand is hitting manufacturing.”

Trade added 1.1 percentage points to U.S. economic growth in the third quarter, when gross domestic product (GDP) actually shrank by 0.5%.

Source: Trade Deficit Grows, Despite Record Decline in Oil Prices

Supplies fell further than expected, with a 4.56 million decline to 302.2 million barrels last week, the U.S. Energy Information Administration announced. At the same time, refineries operated at just 88.6% capacity, a decline of 1.1% from the week prior. Most analysts had expected a mean capacity increase of 0.3%, according to a
Bloomberg News survey.

“This move was sparked by the very bullish crude inventory number,” Daniel Flynn, a broker with Alaron Trading Corp. in Chicago, told Bloomberg. “Falling inventories make us vulnerable to disruptions. The cheap dollar is only adding fuel to the fire.”

The high cost of oil is dampening demand of already overstretched U.S. consumers. U.S. demand declined 1.3% in the four week ended June 6, the energy department said.

However, demand is rapidly increasing in emerging markets such as China, where oil imports shot up 25% last month from the same period a year ago. Imports to the Asian nation increased to 16.2 million metric tons in May, which is about 3.8 million barrels a day, the Beijing-based Customs General Administration of China announced on its Web site yesterday.

“The big crude draw is obviously bullish, but more importantly for the oil markets, the dollar is falling and that could send us back to near $140 a barrel,” Mark Waggoner, president of Excel Futures in Huntington Beach, Calif., told Reuters.

Other factors contributed to the price jump, as well. Nigeria continues to experience production problems due to attacks from the Movement for the Emancipation of the Niger Delta (MEND), which has made life particularly difficult for oil majors such as Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) by bombing pipelines and kidnapping workers.

Russia, the world’s second-largest oil supplier, is also experiencing problems. At a presentation in London yesterday, BP PLC (ADR: BP) Chief Executive Officer Tony Hayward said Russian output would continue to fall without changes to the current tax policy of the Russian government.

“Russian authorities are responding” with fiscal regime changes, though it may take “a couple of years to reverse the current trend,” Hayward said.

High Oil, High Gas, Weak Economy

If oil stays near $140 per barrel, gas prices could easily top $4.75 a gallon by the Fourth of July holiday, Mark Zandi, chief economist at Moody’s Economy.com (MCO), said in a recent research note.

And while the thought of gas at almost $5 per gallon is distressing enough, Money Morning’s Investment Director Keith Fitz-Gerald thinks gas prices could go even higher. In fact, U.S. motorists could easily be looking at $7 a gallon gasoline within just two years. And that could have a disastrous impact on the U.S. economy.

“The bottom line is that the effect on the economy is going to be a lot worse than anyone’s talking about right now,” said Fitz-Gerald, a longtime energy bull who recently boosted his oil-price projection to $225 a barrel. “The bottom line is this: Until someone develops a truly [interchangeable] alternative for oil and gasoline – something that works the same, costs the same and is just as effective – Americans are just going to have to face the fact that over time they’re going to pay more.”

By fixating on near-term prices, and near-term fallout, Fitz-Gerald says that investors and economists alike are missing the bigger point: Long-term – or at least until a true replacement for oil is found – the U.S. economy is going to be badly stung, and U.S. consumers who don’t take steps to protect themselves are looking at a markedly reduced standard of living.

Moody’s Economy.com’s Mark Zandi agrees.

“Unless oil prices soon recede and Washington changes its views and acts to shore up the housing market and broader economy, the outlook for 2009 will weaken further in coming months,” Zandi said.

Zandi added that the U.S. Federal Reserve “will sacrifice near-term growth for the sake of stable prices and the economy’s longer-term prospects” and that the high cost of oil will prevent any further interest rate cuts.

But don’t look for gas prices to move up in a straight line to $5, $6 and $7 a gallon, Fitz-Gerald says. Prices will continue to fluctuate. There will be rallies, and retrenchments, as is the case with the price of any commodity.

But prices will rise, as there is still no truly “fungible” – interchangeable – replacement for petroleum. That’s what’s needed, Fitz-Gerald says.

In the interim, investors should: be “long” on oil and other commodities; have alternative-energy-related investments; and look for profit plays in ancillary sectors, Fitz-Gerald says.

Source: Oil Price Soars $5 on Reduced Supply, Gas Could Head Much Higher

China is announcing to the world (see AFP story) that it will NOT INCREASE OIL IMPORTS due to the impact of the recent earthquake swarm. How utterly, totally responsible of them!

Whoah! Say hello to oil price moderation, if not a slow retrenchment in oil prices. (Is the Fed listening?)

Actually, if this news gets the play it deserves the price of oil ought to sell off by $20 or so per barrel. This pops the bubble.

Seriously. Knock-knock. Who’s there? POP!

The initial energy-speculation on earthquake-related oil demand was based on the fact that hundreds of Chinese dams were damaged by the earthquakes. So hydro-electric power output is down. And the thinking was that China would burn diesel to spin generators. But you just cannot apply conventional thinking to those Chinese. Very inscrutable, no? (Remember the Korean War? No, the Chinese would not cross the Yalu River to fight the American Army, right?)

The Chinese have a way of surprising the world. The reality is that overall electric demand is down in China because of damage to infrastructure. Collapsed buildings and factories do not use electric power.

So with candor verging on the astonishing, China says “no.” China will not increase oil imports.

Also, someone in China must be looking at the import bill for oil at $130 or so, and determining that China has to use oil more efficiently. Especially since China subsidizes fuel at the pump. Chinese consumers do not pay the “world price” for fuel. The difference comes out of the hides of Chinese oil companies, plus the Chinese government. As Mr. T used to say, “The word is ‘pain.’”

Well, China works hard for its money. And the top leaders evidently want to quit spending so much on foreign energy sources. Especially since they have to pay for the oil twice… once to import it, and again to subsidize its use.

As the story below quotes the deputy director of the National Development and Reform Commission, “Now with oil prices so high, it would be unwise to continue increasing the import of oil. It’s a better approach to adopt even more energy-saving measures.”

As for where China is going in all of this… It’s not as if there is a lack of energy-efficiency technology in this world. Really, if there was never another patent issued in any field of energy-related technology — just shut down all research on new ideas — we could spend the next 50 years or so just adapting the existing technology base to transforming the energy systems of the world. The Chinese know this.

R&D for new stuff is good, but the big challenge for the world is systems integration of what is already discovered. The richest energy-mines are in the technical journals on the shelves of the world’s libraries. The Chinese know this as well.

So this news embodies many different levels of importance. But the news is entirely good.

Until we meet again

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: China Isn’t Increasing Oil Imports

Biofuels can boost incomes and yields for farmers, revitalizing impoverished rural areas when they are introduced in countries with secure land ownership, the International Institute for Environment and Development said.

By raising the price of crops such as corn and palm oil, biofuels can reduce poverty in countries with a high dependency on agriculture, the London-based researcher said in a report with the United Nation’s Food and Agriculture Organization.

“Despite the highly polarized debate, biofuels are not all good or bad,” lead author Lorenzo Cotula of the IIED wrote in the report. “Biofuels can either help or harm the world’s poor depending on the choice of crop and cropping system, the business model, and the local context and policies.”

“Ethanol stocks were moving higher for a while,” says Charles Delvalle in Investor’s Daily Edge, “but have gone down since the middle of last year (maybe investors are catching on to how ‘not green’ ethanol really is). Geothermal producers are shooting higher. And those who sell wind turbines are making great money on increasing orders.

“By 2030, Morgan Stanley expects green sales across the globe to total over $1 trillion (that’s bigger than the Gross Domestic Product of 169 of the 181 member countries of the International Monetary Fund!). Most people I speak to see green technology as the wave of the future. It’ll only be a matter of time until they think that investing in green companies is a no-brainer.

“In the end, this whole green movement we see today could very well be the start of yet another massive bubble. And considering the riches that were made during the two previous bubbles, catching the green investment mania early on would be a great way to make a lot of coin in the next few years.”

Chris Mayer in The Daily Reckoning reckons it’s time to consider investing in an essential biofuel ingredient: sulfuric acid.

“The biofuel boom has kicked off a big increase in the demand for sulfuric acid. In fact, some 60% of the sulfuric acid ends up in agriculture. The surge in ethanol production is a double whammy on sulfuric acid. First, all that corn needs fertilizers. And second, the ethanol facilities themselves also use sulfuric acid in their own processing. A typical ethanol facility requires 2,000-4,000 tons of sulfuric acid per year.”

Last week, the price of oil hit $127 a barrel. Oil imports to the United States cost 67% more this year than last. Imports other than oil rose more than 6% – or three times the Fed’s key lending rate. Steel has shot up too – almost 50% in the last 12 months. And gold rose a full $19 on Friday…it’s practically back at $900.

Naturally, the papers are squawking about inflation today. The Financial Times worries that inflation is going to undermine pensions and retirement plans. The International Herald Tribune, meanwhile, says inflation is undermining central banks’ efforts to…well…cause inflation!

Wait – we know what you’re thinking. Something is very wrong with a world where central banks cannot cause inflation any time they want to. Next, they’ll be telling us that you can’t have a cigarette when you want one…

But the papers are full of remarkable things…so why not? Besides, there are so many petards in central banking anyway; Bernanke and company were bound to get hoisted on one of them.

A society has no more real savings (resources set aside) than it actually has. And it sets interest rates (the price of those savings) as it sets any other price – on the basis of supply and demand. When the Fed intervenes with artificially low rates, it is merely pretending that it has resources available that it does not actually have. That is the trick known popularly as “inflation,” in which the supply of purchasing power is inflated with money that doesn’t exist.

Since the beginning of the credit crisis last summer, Fed policy has been purely inflationary – intended to convince people that they had more money and credit than they thought…and that they should spend it and invest it. But that policy can’t work forever. Eventually, consumer prices rise sharply. Then, the game is over…the Fed has to “lower inflation expectations” before it can inflate again. The hocus pocus only has a positive effect, in other words, as long as people are misled…once they catch, the jig is up.

And here we beg readers’ attention of a moment of deeper thought. This classical, cynical view of inflation seemed to be wrong for so long people began to think it was wrong forever. An entire generation has grown up with 1) a dollar with no connection to gold, 2) a dollar that actually rose against gold for 20 years, 3) Wal-Mart’s Every Day Low Prices, 4) apparently inexhaustible supply of cheap labor 5) globalized markets and supply chains and 6) falling bond yields. No wonder people began to think that inflation was no problem…and never again would be. Central bankers claimed they could now control economic cycles so as to have growth without inflation…boom without bust…forever. But forever seems to have come to an end already.

“The specter of inflation has risen over financial markets…” begins the IHT story.

Central banks can only get away with making money easier to get when consumer prices are under control. When prices for gasoline, milk and margarine begin to rise, people get fussy. They want their central banks to stabilize prices. And central bankers themselves look at their lending rates and get a little embarrassed. “How come you’re lending money so cheap?” economists ask them.

The fear is that if inflation is allowed to get “out of control,” it takes harsh policies to bring it back in line. Harsh policies are what everyone wants to avoid…especially before an election.

Classical economics tells us that an asset price bubble is always followed by an asset price bust. Inflation is followed by deflation, in other words.

But in our funny, complicated world, we get both inflation and deflation at the same time. The last two big bubbles – in residential housing and the financial industry – are deflating. Prices are going down for both assets. But inflation-sensitive commodities, most notably oil and gold, have soared. And now prices seem be working their up all along the chain…from the oil wells, to the shipping containers, to the Chinese sweatshops, to the shelves of Wal-Mart. A photo in today’s paper, for example, shows a pump at a filling station in New York with diesel fuel over $5.

What this means to central bankers is that they have to watch it. They can’t cut rates so freely…not while consumer prices are rising. Instead, the pressure will be on the other side – to raise rates.

To the man on the street it means that he has to prepare to pay higher prices for everything.

And to investors? What does it mean? It means inflation will do the work the bear market hasn’t been willing to do – that it will reduce the real value of stocks and bonds, even if nominal prices remain steady. Tim Bond, of Barclay’s Capital says, “investors have to be prepared for a few very unpleasant years. Bonds of all types – aside from index-linked – have no place in portfolios at current yields. Equity exposure should be narrowed to resources, energy, industrial goods and services – and once the write offs are completed – financials.”

*** Being the world’s leading hegemon is mostly thankless. You have to maintain military garrisons all over the world and try to keep the barbarians under control – which is so expensive you are almost guaranteed to go broke. And when a competitor challenges you, you have to meet the challenge. Cartago delenda est (Carthage must be destroyed), as Cato put it.

The only benefit of empire is also a curse: you get to tell others what they should do. Thus did the U.S. president lecture the Mideast yesterday, says today’s paper. Unfortunately, your earnest attempts at world improvement are seen by others as nothing more than hollow vanity. “You want to be a winner,” you say to the wogs and wallywallies, “then be like me.”

Everyone wants a little edge…a little extra grandeur…the feeling of superiority that comes from being among the elite. (There is also the hope of catching a few crumbs as they fall from the grand table.) So, typically, subject peoples try to sidle up to imperial race…and imitate their speech, dress, and manners. During the Roman era, for example, the local people of Londinium wore togas, spoke Latin, gave their children Roman names, worshipped Roman gods and angled for jobs and gratuities from their Roman masters. Later, the British Empire brought out the same fawning sycophancies. Even though the English tried to keep their culture to themselves, it was not uncommon to see a freed slave in Jamaica or an uppity native in far Mandalay speaking English and wearing a waistcoat.

Traders responded to the potential for declining demand in the emerging markets. China’s oil imports were reported to have fallen in April, and India’s industrial production grew at the slowest pace since 2002.

“If you have a continuation of that drop in Chinese imports, if that extends beyond a month, and if you have a slowdown in India, that obviously changes the dynamic” for the oil market, said Kyle Cooper, of IAF Advisors in Houston.