Tim Rogus, a retired publisher in suburban Chicago, has noticed fuel prices at the petrol station creeping up towards $3 a gallon, as oil has rebounded to four-year highs this month, but he is philosophical about it. “Our prices were nearly $4 at one point,” he says. “Life has to go on somehow.”
His attitude sums up the expected impact on US consumers of rising oil prices: not a disaster, but another burden to bear, with rural areas and middle-income households hit the hardest.
Americans are expected to spend an average of $400 per household more on fuel this year than in 2016, as the rebound in crude prices is reflected in the cost of petrol at the pump. By contrast, middle-income US households will on average gain $930 each from the tax cut bill passed at the end of last year, according to the Urban-Brookings Tax Policy Center.
The average price of petrol in the US was about $2.75 a gallon last week, according to the government’s Energy Information Administration, up $1 from its low point of about $1.75 in February 2016.
The “driving season”, the peak of petrol consumption in the US, is April to September, and the EIA expects prices this summer to be at their highest for four years, up 10 per cent from 2017.
Oil has been pushed higher by the success of Opec’s strategy of restricting output, and international risks including Saudi Arabia’s war with Houthi rebels in Yemen, and tension between the US and Russia over Syria.
A decade ago, before the shale oil boom, prices at these levels would have loomed large for US policymakers. The surge in US production, which has cut net imports sharply, has calmed those fears.
“Ten years ago, White House economists looking at gross domestic product and job creation would be quite concerned if oil prices rose significantly,” says Jason Bordoff, a former official in the Obama administration who leads the Center on Global Energy Policy at Columbia University. “It’s a different world now.”
When oil prices fell sharply after the summer of 2014, the net stimulus to the US economy was “effectively zero”, wrote economists Christiane Baumeister and Lutz Kilian in a Brookings paper in 2016. The boost to consumers from cheaper fuel was cancelled out by a slump in investment in the oil industry. As oil prices rebound, the overall impact on US growth is similarly likely to be very small, Mr Kilian says.
But while growth may not be much different overall, its composition will be affected, with an investment boom in the oil industry offset by a drag on consumer spending.
Cheaper oil handed a windfall to middle-income households, more than half of which was spent, according to research from the JPMorgan Chase Institute. Now, some of that boost is being withdrawn.
The impact varies widely across different types of consumers. Rural households spent about 16 per cent more on petrol on average than urban households in 2016. Fuel accounted for 4 per cent of total household spending for middle-income Americans, but only 2.6 per cent for the highest earning fifth.
There are already signs that higher fuel costs may be starting to have an effect. US retail sales excluding fuel, food and cars have been roughly flat since November, data from the commerce department showed on Monday.
In effect, the boom in the hotspots of the oil industry such as west Texas, where truck drivers are being hired for $100,000 per year, is being paid for by consumers.
One effect not yet seen from higher fuel prices is a drop-off in demand. Petrol consumption is likely to be slightly higher this summer than it was last year, the EIA has forecast.
“People aren’t going to start cancelling trips with gasoline at $2.75, and probably not at $2.95,” says Tom Kloza, head of research at Oil Price Information Service.
“If the economy keeps chugging along, you’ll have to see more than 25 cents more on the price before you see a significant demand response.”
Additional reporting by Patti Waldmeir in Chicago
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