As I have discussed in a previous blog post on May 18th, our country’s reliance on foreign oil has massive direct and indirect costs on American consumers and the U.S. economy.  There have been some interesting recent developments that merit revisiting this topic, including the President’s sound decision to open the strategic reserve taps and the decline in gasoline prices over the past month or so.  Moreover, newly released statistical data further our understanding of this massively important issue, so let’s drill down a bit more here.

When oil prices go up, Americans pay a lot, be it through higher payments at gas stations, higher payments to businesses that pass along higher fuel costs to their consumers, or higher payments to the countries from which we buy oil.  And, despite a recent 40-cent-per-gallon decline in volatile gas prices, Americans are still paying a lot to support this country’s addiction to gasoline and foreign oil.

Let’s start with how much Americans pay at the pump.  As I have pointed out before, the demand for gasoline is “inelastic.”  That is, our driving habits don’t change much when gas prices increase -- we continue to buy roughly the same number of gallons as when prices are lower; therefore, the amount spent on gasoline increases.  To that point:  the amount the average household spent on “motor fuels” – the vast majority of which is gasoline – was $249 per month in October 2010, when gasoline averaged $2.85 per gallon (Figure 2). Though the rate of increase slowed in May (and lately we have seen prices come back down) marking a smaller than usual increase for the start of the summer driving season, spending on motor fuels was still $301 per household in May or $108 per person.  Since the demand remained fairly constant despite this increase in cost, households are paying $52 more than they paid in October of last year when prices were lower.  And, of course, money spent on gas means that much less is available to save or spend on other things.  Thankfully, the President’s tax cuts signed into law last December are helping to provide households with about $50 more per month in take-home pay.

Also, as I discussed in a previous blog, consumers face many indirect costs from higher gas prices, as businesses such as airlines pass along at least some of their higher fuel costs through higher prices. 

The last cost, and perhaps one of the most important for our nation, is what we pay directly to other countries around the world for foreign oil.  As shown in the third figure below, the most recent official data show that – though there was a surprising decrease in April – the petroleum deficit per household totaled $966 and $347 per person during the first four months of 2011. So even if prices don’t change much for the remainder of 2011, basic math tells us that America’s petroleum-related deficit for the year could easily reach close to $2,900 per household and more than $1,000 per person.  Ouch.

Given these costs and others, it is crucial for America to reduce its dependence on foreign oil by supporting investments in a clean energy economy that create new jobs and new industries of the future through safe and responsible oil production here at home.  Only then can we protect our families from soaring oil costs, keep more of America’s hard-earned dollars in America, and ensure greater economic security for our country in the years to come.

~Mark Doms, Chief Economist, U.S. Department of Commerce

June 29th, 2011

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