Go here [1] to see a version of this blog post updated with fresher data.
When oil prices go up, Americans pay … and we pay a lot (See Figure 1). We pay directly at the pump; we pay as businesses pass higher fuel costs on to their consumers (think airline fares); and, as a country, we pay foreign countries to support our fuel habit. Wouldn’t it be far better if we could keep the hundreds of billions of dollars that we currently spend on foreign oil every year instead of shipping our hard-earned money overseas?
High oil prices are a burden on all of us, but price fluctuations are usually outside of our control. While prices may eventually return to lower levels, history shows they will inevitably rise again, and we’ll again hear the cries for relief. But let’s not wait for them to come back around; it makes dollars-and-cents sense to wean ourselves off foreign oil now.
Oil prices are a main driver of gasoline prices, so let’s start with how much Americans pay at the pump. It is difficult for many of us to suddenly change how much gasoline we purchase when gas prices go up; we still have to drive to work, go to the grocery store, and drive our children around town to their various activities. In economics speak, we say that this means the demand for gasoline is inelastic. To that point: When the price of gasoline shot up from $3.01 per gallon in July 2007 to $4.11 per gallon in July 2008 (a 37 percent rise), Americans reduced the gallons of gasoline they purchased by just 7 percent (and at a time when the economy was slowing), so demand for gas was likely falling as well.
Figure 1 shows how much money per household we spend on gasoline and how that changes as gas prices change. In October 2010, gasoline prices averaged $2.85 per gallon (seems like the good old days, eh?) and the average household spent $249 per month on “motor fuels” – the vast majority of which is gasoline. In March 2011, when gasoline prices shot up to $3.62 per gallon, the average household spent $305, or $109 per person. That means each household in America took a $56 hit, with that much less on hand every month to save or spend on other things. The official data for April isn’t out yet, but Americans’ spending on gas will continue to increase since we already know that gas prices averaged $3.85 per gallon in April. On average, for every 10-cent increase in the price of gas, the average household is out an additional $7 per month.
Consumers clearly see the direct costs of higher gas prices, but there are indirect costs as well. Businesses feel the pinch too, and they often pass additional fuel costs on to their customers. Unlike the gasoline prices we see every day, these indirect costs are stealthier, but no less harmful to the pocketbook. We can’t say with certainty just how much (or when) prices for other goods and services will go up when oil prices rise, but we can gauge how significant these indirect costs would be by considering how much businesses rely on gasoline relative to consumers. For instance, if consumers purchased 90 percent of all gasoline, then the pain at the pump (the direct costs) would overshadow any indirect costs.
Input-output tables are designed by the Bureau of Economic Analysis to answer this question – and 43.8 percent of motor and jet fuel is purchased directly by consumers, while 41.4 percent is purchased by businesses. (Government purchases the remaining 14.8 percent to help fuel ambulances, police cars, and F-18’s.) Since businesses purchase almost as much fuel as consumers, indirect costs can be considerable. One of the most prominent examples as we head into the summer travel season is passenger airlines. Fuel is a major cost component for airlines, so it’s quite likely that they will quickly pass their cost increases to customers in the form of higher airfares. Figure 2 shows a price index for passenger airline fares based on the Consumer Price Index and the price of crude oil. While these series don’t follow in nearly as close lock-step as gas prices and how much we spend on gas, we still see a strong relationship. When crude oil prices rise, or decline, airfares follow. From last October through April, passenger airfares have increased 12.1 percent.
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 – that is, the billions of dollars we ship out of our country every month to feed our oil habit. In 2010, our trade deficit in petroleum-related products (we don’t say “oil” because we import and export some refined products as well) totaled $265 billion [2]. That translates to $855 for every American and almost $2,400 for every American household in 2010. That’s a lot of money!
What’s happening so far this year? Not surprisingly, the situation is even worse. As shown in Figure 3, the most recent official data show that the petroleum deficit per household averaged $746 and $268 per person in the first quarter of 2011. So if oil and gas prices remain anywhere near where they are today through the remainder of 2011, our petroleum-related deficit for the year could easily reach close to $3,000 per household and more than $1,000 per person. That’s just wrong. Adding fuel to the fire, not only are these numbers large, but petroleum-related products account for a huge chunk of our overall trade deficit. In the first quarter of 2011, petroleum-related products accounted for 59.5 percent of the total U.S. trade deficit.
These points show us the American reality that results from a dependence on foreign oil. And we only touched on some of the consequences – there are others, such as businesses hesitating to hire additional workers when facing higher energy costs, or consumers becoming less optimistic and spending less as a result of sticker shock at the pump, and so on. So what can we do? Clearly, the only real answer is to reduce our dependence on foreign oil, and we can do that by increasing safe and responsible oil production here at home and supporting investments in a clean energy economy that create new jobs and new industries of the future. 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
May 18, 2011
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