America’s current-account deficit, which reached 6% of GDP in 2006 and is still worth 3%, “has been a long-standing drag on the dollar”, says Mansoor Mohi-uddin of UBS in the FT. This looks set to change.
A key reason for the deficit is that the US is a major net energy importer. But now “striking new technological developments” are boosting domestic energy production. A new drilling technique called fracking allows firms to reach huge gas reserves trapped in shale rock and it has also become much easier to exploit hitherto barely accessible oil reserves.
Already the ratio of US gas reserves to annual production has risen from eight to 12 years; it could reach 100 years. As for oil, imports have already declined from 65% of total US consumption in 2007 to 61%.
Given America’s potential to “dramatically increase” its energy reserves and reduce imports, over the next few years the current account could decline to much lower levels as a percentage of GDP or reach a surplus.
With this tailwind, the “consensus forecast that the greenback will keep on depreciating to rebalance America’s current-account deficit will need to be torn up”. Rising American energy production is likely to deliver a “shock for long-term dollar bears”.