U.S. oil production is booming. Is “Dutch disease” on the way?

March 19, 2013

The United States is suddenly awash in fossil fuels. Oil output has risen to its highest level since 1992. Natural gas is booming, thanks to new and improved fracking techniques. Refined petroleum has become one of the country's top exports.


(Michael S. Williamson./The Washington Post)

Which means it's time to start wondering... about "Dutch disease."

Dutch disease isn't some weird fungal infection. It's an odd economic phenomenon that often afflicts countries rich in natural resources. Back in the 1960s and '70s, the Netherlands discovered a large natural-gas field and began selling the gas abroad. That, in turn, drove up the value of the Dutch currency. And that currency rise, in turn, crippled Dutch manufacturers by making their exports more expensive. That's Dutch disease.

Could the same thing happen in the United States? Perhaps, though we're expected to contract a much milder version. In a new research note, JP Morgan economist Michael Feroli argues that in a few years, the boom in oil and natural gas could shrink the U.S. trade deficit significantly. That, in turn, could drive up the value of the dollar, which would in turn hurt U.S. manufacturing and other export sectors.

He offers up some rough numbers: The oil and gas boom is estimated to increase the value of the U.S. dollar somewhere between 0.5 percent to 3 percent in the years ahead (the smaller value is most likely). Meanwhile, cheaper shale gas would have to drive down energy costs for U.S. manufacturers some 26 percent just to counteract that effect. That's highly unlikely, given recent trends.

"It would thus appear it's possible the U.S. could catch a very mild case of Dutch disease," Feroli notes. The oil and gas boom could well come at the partial expense of, say, U.S. manufacturing.

Now, the big question is whether this is a concern or not. In a recent VoxEU essay, three World Bank economists argued that Dutch disease does appear to hurt poorer countries that rely disproportionately on oil or other natural resources — say, Venezuela or Angola. But for wealthier countries with healthy political institutions, the effects of Dutch disease are far less pronounced. Oil isn't always an economic curse.

It's worth noting that Canada is having this exact discussion right now. As Alberta's oil sector has grown and thrived in recent years, the value of the Canadian dollar has risen. At the same time, Canada's auto manufacturers have become less competitive. Critics have often chalked this up to the dread Dutch disease.

But not everyone's convinced this is a big problem. "The symptoms we are seeing are not those of Dutch Disease but rather of structural changes in the global economy to which Canada must adjust," said former Bank of Canada governor Mark Carney in a big speech last September. He argued that Canada's oil wealth was, on net, a good thing for the country's economy and even offered some recommendations for policymakers to grapple with the shifts in the country's economy. (Among other things, he warned the central bank not to intervene in the shifting exchange rates.)

Who knows? Perhaps a few years down the line, Fed officials will be delivering similar speeches here in the United States.

Further reading:

--U.S. oil imports are falling to their lowest level since 1987.

--This VoxEU essay discusses various ways that countries try to counteract Dutch disease.

--Meanwhile, the oil boom also has another catch — more carbon emissions and hence more global warming. Here's a more detailed look at what the United States can do about that in the next four years.

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Ezra Klein · March 19, 2013