uploads///The US Energy Renaissance Has Helped Cut the Current Account Deficit

How the US Energy Renaissance Has Affected the Dollar

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Sep. 17 2015, Published 2:14 p.m. ET

The US energy renaissance

As the US has become more energy independent, we’ve had to import less from overseas. Over the last 10 years, the US current account deficit has been cut roughly in half, and a large part of that improvement has been a function of surging US domestic oil production. Looking forward, rising US production should continue to support a strong dollar.

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Market Realist – The US energy renaissance has supported the US dollar as the trade balance has improved.

The US energy renaissance has been a game-changer in the crude oil (USO) space. Crude oil production has seen a massive increase in the last five years. Despite a fall in the US rig count, greater efficiency has allowed US domestic production to rise by roughly half a million barrels since the end of 2014. The United States could soon overtake Russia (RSX) as the highest non-OPEC (Organization of the Petroleum Exporting Countries) oil producer.

Higher oil production in the United States means that the import bill is drastically lower. As the graph above shows, the current account deficit, as a percentage of the US GDP (gross domestic product) has decreased from 5.9% in 2006 to 2.4% currently.

Lower imports also mean lower selling pressure on the dollar (UUP). This in part has supported the dollar in the past few years and is likely to support the dollar going forward.

However, low oil prices are likely to strangle the margins of energy companies (IYE)(XLE). Some debt-laden energy companies may have to merge with a bigger company to survive, while some may have to file for bankruptcy.

Read on to find out why the dollar could remain strong for years and not months.

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