Retail gasoline prices have risen by a dollar over the past 12 months as the economy began to reopen, increasing demand for fuel. Higher pump prices are now crimping consumer budgets and putting a brake on household spending on non-energy items, according to analysts.
Prices at the pump as of Oct. 5 have soared to $3.20 per gallon for regular gasoline, which is slightly over a dollar higher than a year ago.
“Historically, there is a tight relationship between changes in retail gas prices and consumer spending on energy goods and services,” Deutsche Bank analysts wrote in a recent report.
This relationship, they noted, suggests that a 1 cent rise in gas prices increases spending on energy and thus reduces income for non-energy related goods and services by $1.18 billion.
“Based on this relationship, the 101 cents increase in gas prices from one year ago would be expected to lead to a reduction in income that can be spent on non-energy items of approximately $120 billion–assuming that pump prices remain near current levels over the next several months,” they wrote.
Oil prices hit a 7-year high on Oct. 4 after the Organization of the Petroleum Exporting Countries and Russia (OPEC+) said they would stick to their original plan and increase output modestly. The group ignored the pressures coming from the Biden administration and other oil consuming nations and opted against boosting oil production.
In a statement, OPEC+ “reconfirmed” its previous production plan to return its output to pre-pandemic levels, which is to increase oil production by 400,000 barrels a day in November.
West Texas Intermediate, the U.S. oil benchmark, rose 2.3 percent following the announcement, reaching a seven year high. Brent, the international gauge, also rose 2.5 percent, settling at the highest level in three years.
“At first glance, the $120 billion hit to disposable income does not appear particularly concerning given very healthy household balance sheets,” Deutsche Bank analysts wrote.
U.S. consumers have healthy balance sheets as they sit on $2.4 trillion in excess savings accumulated since the beginning of the pandemic, thanks to generous government stimulus.
“However, it is important to remember that most of the excess savings are largely concentrated amongst higher-earning households who had cut back on services expenditures.”
Lower income households have lower excess savings and more exposure to energy price changes as they spend larger share of their income on fuel and utilities, they added.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, dropped 0.1 percent in July, according to the revised data from the Commerce Department on Oct. 1.
The weak consumer spending in July led banks to revise their near-term projections for U.S. economic growth. JPMorgan is the latest bank to lower its estimate for the third quarter. The bank’s analysts now forecast 4.0 percent annualized real gross domestic product growth for the third quarter instead of 5.0 percent.
A continued rise in gas prices is adding to inflationary pressures in the United States. Strong recovery in global demand and slow growth in supplies have been pushing crude oil prices higher in recent months.
Worried about this trend, the Biden administration has called on OPEC+ to raise their oil output to support the global recovery from the pandemic.
“While OPEC+ recently agreed to production increases, these increases will not fully offset previous production cuts that OPEC+ imposed during the pandemic until well into 2022,” National security adviser Jake Sullivan said in a statement on Aug. 11. “At a critical moment in the global recovery, this is simply not enough.”
The White House reacted to the recent announcement by OPEC+ not to change its course on production.
“We’re going to continue to use every tool at our disposal,” White House press secretary Jen Psaki said during a press briefing on Oct. 4 “to ensure we can keep gas prices down for the American public.”
Measures taken by the Biden administration, she said, include addressing the shortage of truck drivers that cause fuel delivery disruptions and monitoring U.S. gasoline market to prevent illegal activities that drive up gas prices.
Oil industry experts have been criticizing the Biden administration’s climate policies, claiming that these policies are discouraging domestic producers.
“I think the Biden administration’s been a major factor in driving prices,” Phil Flynn, senior energy analyst at Price Future Group told The Epoch Times. “There’s been kind of a dearth of investment in fossil fuels. So that’s going to leave us undersupplied as we go forward.”
Emel Akan is White House economic policy reporter in Washington, D.C. Previously she worked in the financial sector as an investment banker at JPMorgan and as a consultant at PwC. She graduated with a master’s degree in business administration from Georgetown University.