This Is How Much U.S. Households Lose As Gas Prices Rise

Oil Price – by Tsvetana Paraskova

U.S. gasoline prices are at a four-year-high this year as a result of the higher price of oil which has reached a three-and-a-half-year high in recent weeks.

The increased pump prices are now eating into the disposable income of the average American household that will have a total of $440 less to spend this year on other goods and services because this money is expected to go for buying higher-priced gasoline.  

The higher spending on gas could offset one-third of the gains from the tax cuts, with low- and middle-income families feeling the pinch much more than higher-income earners, according to S&P Global economists Beth Bovino and Satyam Panday.

“This would be tantamount to a tax increase for American households,” the economists wrote in a recent report, quoted by Bloomberg. “This is especially true for middle- to low-income Americans.”

The higher-income families, on the other hand, will be less affected by the increase in pump prices because spending on gasoline accounts for a smaller share of their total disposable income.

“The income tax cut is virtually compensating those who were hurt least from the oil-price change, which may result in even larger inequality,” according to Bovino and Panday.

Despite the higher spending on gasoline, however, the overall U.S. economy is now less oil-dependent than in the past, so oil prices in the $70s will have a more mitigated impact on economic growth than it would have in previous years, the S&P Global economists and Fed economists say.

For this year’s April–September driving season, the EIA expects U.S. regular gasoline retail prices to average $2.87/gallon (gal), up from an average of $2.41/gal last summer, mostly due to expectations of higher crude oil prices. According to the Short-Term Energy Outlook (STEO) from June, monthly average gasoline prices may have peaked in June at $2.92/gal and are expected to drop gradually to $2.84/gal in September.

For this year’s July 4 holiday, U.S. drivers will be paying the highest Independence Day average gas prices since 2014—at $2.90/gal, compared to $3.66/gal for July 4 in 2014, when oil prices were $100 a barrel, according to GasBuddy.

Although current national average gas prices are below the May peak of $2.98/gal, a price jump may be looming, due to OPEC’s announcement of a smaller-than-expected oil production increase, the U.S. push to have Iran oil exports down to “zero”, and significant U.S. crude oil stockpiles draws, GasBuddy says.

According to AAA, last week the United States saw the largest one-week reduction—9.9 million barrels—in crude inventories for the first summer driving season in five years. “If the decline in inventories continues and oil prices remain high, motorists could see a spike in gas prices later this summer despite the anticipated increase in production from OPEC and its partners,” AAA said last week.

Still, the higher oil prices now have a more muted impact on the U.S. economy than before, Dallas Fed President Robert S. Kaplan wrote in an essay last month.

Several factors have mitigated that impact over time. One is U.S. shale production—higher domestic oil production means that a larger share of the economy is helped by higher oil prices. Then, reduced crude oil imports benefit the U.S. trade balance. Finally, the U.S. economy is less oil-intensive now than in the past, because of higher fuel efficiency, other forms of energy substituting part of the oil dependence, and higher share of less-energy-intensive services sector as a share of the overall economy, Kaplan argues.

For example, in 1970, the U.S. consumed 1.1 barrels of oil for every $1,000 of gross domestic product (GDP). By 2017, only 0.4 barrels of oil were consumed for every $1,000 of GDP, the Dallas Fed president says.

“Based on these various factors, it is the view of Dallas Fed economists that the negative impact of higher oil prices on GDP growth is likely to be more muted than in the past. It is our view that a 10 percent increase in the oil price should have a relatively modest negative impact on U.S. GDP growth. This negative impact should further diminish as the U.S. continues to grow its domestic oil production,” Kaplan writes.

By Tsvetana Paraskova for Oilprice.com

https://oilprice.com/Energy/Oil-Prices/This-Is-How-Much-US-Households-Lose-As-Gas-Prices-Rise.html