Significant Cultural Change Ahead
The text, data and calculations for this essay are based on a detailed research project I did in 2012. Although the data is a bit old, the discussion is as relevant today as when I did the original analysis.
Putting together the research for this essay has not been an easy task. One cannot take available data at face value. Some of the data is unavailable. Much of it is untrustworthy. I was thus forced to make many estimates and assumptions. Because of these challenges, the content of this essay can only be taken as indicative of broad trends. The content, charts, tables, statements, comments, conclusions, and forecasts found in this essay are presented without any warranty.
My wife and I were shopping for groceries at our local supermarket. We overheard a woman tell her little boy: “That’s all we have to spend here. We still need to buy gas to get home.”
I wonder how many times a day this same scenario plays out. Food or gas. Food or rent. Perhaps if our people in Washington spent more time at the checkout counter, they would have a gut level sensitivity to the inflationary spiral currently driving food and fuel prices.
We hear consumers have less money to spend on food, clothing, housing, and discretionary items because the price of oil has risen to ~ $99 per barrel on world markets. That translates into higher prices for gasoline, diesel, kerosene, propane, and heating oil fuels as well as thousands of other products that are either made from oil, or use oil in the production and distribution of finished goods. Of particular concern is the impact of higher oil prices on the cost of food. The USDA tells us that in 2020, about 10.5% of American households had either low food security (needed financial help to cope with food prices) or very low food security (in 5.1 million households one or members of the household occasionally did not get enough to eat).Will higher oil prices increase food insecurity? Absolutely.
My “Law of Unequal Distribution” states there will be an unequal distribution of economic change among the economy's participants. Although there are several different ways to classify people in order to make comparisons, the most common measure of economic change is money. Oil prices are a particularly good illustration of this law because higher oil prices have a serious impact on lower income households. They will pay a higher percentage of their income to purchase products made from oil. But will they really be hurt? Can the effect be quantified? And what is the potential social outcome?
Intrepid analyst that I am, I plunged into this project with a grim determination. I fired up my trusty spread sheet and diligently searched the WEB for answers. What follows are some observations on the price of products made from oil, and how these costs affect the American consumer. We want to know: How will rising oil prices will impact the finances and lifestyle of American households?
We start with a determination of how much these households are likely to spend on gasoline or diesel motor fuel, assuming they drive an average of 11,000 miles per year (national average).
Estimated annual motor fuel costs, versus percentage of household income, are shown in the following graph. Households with an annual disposable income of $25,000 have an average of 1.05 vehicles per household, and consume an estimated 385 gallons of motor fuel worth $1,451 per household. That’s just under 6% of household income. Households with an annual income of $50,000 have an average of 1.49 vehicles per household, and consume an estimated 636 gallons of motor fuel worth $2,397 per household. That’s almost 5% of household income. By contrast, households with an income of $275,000 or more have an average of 3.31 vehicles per household, and consume an estimated 1,468 gallons of motor fuel worth $5,535 per household. That is, however, just 2% of household income.
Oil Expense as a Percentage of Income
But at what point are households forced to alter their lifestyle because they can no longer afford the price of oil products they purchase? In the following charts, we use household incomes of $25,000, $37,500, $50,000 and $100,000 for this analysis. Most welfare and Social Security recipients fall within the two lower income levels. According to census data, approximately 49% of American households (~57,000 units) have incomes of $50,000 or less.
In this analysis, we calculate the average number of vehicles per household, the typical miles per gallon each vehicle gets, the number of gallons of gasoline or diesel motor fuel each household consumes, the cost to heat the household, and the cost of other oil products and services the household consumes. In addition to heat and vehicle fuels, households will directly purchase high oil content products (motor oil, plastics, lubricants, fertilizers, chemicals, etc.), and indirectly purchase low oil content products and services (where oil products are used in a manufacturing process, agriculture, or the provision of a service).
It would appear that if a household is forced to spend more than 20% to 25% of its disposable income on oil products, then it will eventually be forced to alter its lifestyle. It is highly likely oil product consumption will decline if income divided by the household’s cost of living is less than 1 for an extended period of time. As we have seen in our budget analysis, households have to set aside a substantial portion of their income for housing, food, clothing, and other necessities.
Households with Natural Gas for Heat
The projected pressure on household finances is somewhat less if a household uses natural gas rather than heating oil or propne.. Households with disposable incomes of $25,000 will have entered the “red zone” by the time oil reaches $124 per barrel. Households with an annual disposable income of $37,500 will have entered the red zone by the time oil reaches $149 per barrel, followed by households with a disposable income of $50,000 at $174 per barrel, and households with a disposable income of $100,000 at $199 per barrel. Homes that depend on heating oil or propane pay a higher percentage of their income on oil products.
Let’s see if we can quantify how the price of oil affects the size and characteristics of the American motor vehicle market. Using the basic data described above, we can develop a profile of probable light vehicle ownership at different oil price points. For this analysis we add together the average the cost of household heat, motor fuels, direct oil product consumption, and indirect oil product consumption, across all households for each income level, and plot vehicle ownership by the price of oil per barrel in $25.00 increments starting at $74 per barrel. As the price of oil increases, families and individuals are forced to spend a greater percentage of their income on oil products. This decreases available funds to purchase and operate a motor vehicle. As the price for a barrel of oil increases from $99 to $199, projected vehicle ownership among lower income groups declines rather quickly. Although the decline in vehicle ownership does not occur immediately, it would appear lower income consumers will eventually be forced out of the light vehicle market. In the following graph, we show this trend for households that have an annual income of $25,000 $37.500, and $50,000.
This projected change in total vehicle ownership by income group is shown in the following graph.
At $74 per barrel, American light vehicle ownership appears to have been 636 vehicles per 1,000 people (assuming a population of 310,000,000 persons), or ~ 197,234,500 units. At a price per barrel of $199, vehicle ownership among the three lower income groups described above will have declined by ~ 56%. Vehicle ownership among higher income groups will decline ~ 2%. In this scenario (which ignores population growth, and the effect of inflation on other household costs), total vehicle ownership declines by ~ 22% to a total of ~ 153 million vehicles if the price of oil reaches $199 per barrel. American motor fuel prices will then exceed an average of $7.30 per gallon (regular grade). Gasoline prices in some states will be substantially higher. At these prices, it would appear Americans will be forced to reduce the number of light vehicles used for personal transportation to about ~ 495 vehicles per 1,000 persons.Households with annual disposable incomes of up to $50,000 currently own about 37% of these vehicles. At $199 per barrel, high oil prices will eliminate about 41 million vehicles as lower income households are forced out of the light vehicle market. Their share of the light vehicle market declines to ~ 21%. Households with incomes of between $51,000 and $100,000 currently own ~ 31% of all light vehicles. This increases to ~38% of the market at an oil price of $199 per barrel. The percentage of vehicles owned by households with an income of $101,000 to $200,000 increases from 22% to 28%, and the percentage of households with an income of over $200,000 increases from ~ 9% to 12%.
The availability and price of oil has serious cultural and economic implications. At least 25% of American households are currently being forced to alter their lifestyle. At $199 per barrel, this percentage increases to at least 67% of households.
In Winter, lower income households are forced to choose. Fuel for heat and hot water, or fuel for the car? Food for the table or fuel for the furnace? As oil prices increase, these choices will become more difficult – and depressing. There isn’t enough money. It becomes a challenge to find enough cash to pay for household heat. In some communities, public and private groups help households that consume oil products for heat by contributing to the purchase of heating oil, propane or kerosene. A few precious gallons at a time.
The freedom of personal transportation has long been a fixture of American life. For lower income households, however, this freedom is being curtailed. As the price of oil increases beyond $99 per barrel, the stress of this change will become ever more evident. Vehicle operating costs – including fuel, purchase costs, maintenance costs, insurance and fees - become prohibitive. Oil costs also push up the purchase price of other goods and services. Vehicle ownership will decline. Vehicle miles traveled will decline. Households become more dependent on the local community. It will take longer and be more difficult to commute to work. Declining mobility forces workers to move closer to the place of their employment, even if it means moving into a less desirable neighborhood. Many households living on Social Security cannot function without local a public transportation option. Lower income households will need locally available shopping, medical, dental, banking and other services. Local and State governments will have to rethink the placement and staffing of schools, clinics, and public safety facilities.
Retailers will reorganize the distribution of food and other goods. Think about it. If many of your customers must struggle, or are unable, to come to your place of business, what do you do?
Personal mobility creates the perception of social equality. The decline of personal mobility will be psychologically painful and socially demoralizing. How many Americans live in substandard housing, but are proud owners of a vehicle? Without a personal vehicle, one feels trapped.... helpless. Expect increasing social discontent and anger as higher oil prices exacerbate the financial divide between upper and lower income groups.
It should not be a surprise that most of the economic impact relates to the means of transportation. Moving people and goods. Distribution of products and services. Economies of scale will become far more important. Railroads or highways? Airplane or train? Trucks or containers? Cost per mile of travel. Weight per dollar per mile of travel. Fuel efficiency. Busses and share ride vans become a growth industry. Assume an increased demand for shopping services that bring groceries and other products from the store to your home.
Aside from occasionally begging a ride with someone else, higher oil prices will force a segment of lower income groups into public transportation. It’s either that or don’t go. Sure. We are experiencing an intermediate period where lower income people keep their old vehicle until it dies, or make the stretch to purchase an inexpensive (probably used) vehicle that gets great gas mileage. But as we have shown in the text and graphs above, the American vehicle market will gradually favor cars, trucks, SUVs, and vans that appeal to the more affluent because these are the only households that can afford the cost of fuels.
In a nation without enough cheap energy, GDP has to deteriorate. Without assertive and competent government planning, unemployment will increase. Limited mobility makes the daily commute to work an arduous task. Higher energy costs limit business activity. Higher oil prices also translate into higher rates of inflation, especially for the current consumption of food, fuels, clothing, and so on. Despite gradual gains afforded by increases in energy efficiency and “green” energy, America’s economic fortunes are inexorably tied to the availability and price of cheap oil, natural gas, coal, and nuclear power. The disappearance of low cost energy will definitely damage America’s economy.
Unfortunately, America does not have a credible energy policy. It does not have a proactive energy exploration, production, and distribution strategy. Government is not focused on the need for cheap energy. Instead, America has a patchwork of politically correct Federal and State energy measures that guarantee Americans will pay higher prices for gasoline, diesel, propane, kerosene, heating oil, and jet fuel. Public policy also favors higher prices for electricity, thus increasing the cost of electric heat and making electric vehicles less attractive as a transportation option. Federal and State regulation continues to increase the cost of operating of natural gas, nuclear, coal and hydroelectric generation facilities, thus making electric heat more expensive. It would appear our political system is determined to place limits on the supply of affordable energy. For the American consumer, the cost of current consumption (including food and fuels) will go up. That’s called inflation.
America does not have a credible public transportation policy. Although politicians routinely give this subject the appropriate amount of lip service, the United States does not have a comprehensive strategy for the funding, construction, maintenance, and operation of public transit lines and terminals. Railroad infrastructure and operation has been largely ignored. The integration of public and private systems needs far more proactive attention.
The United States will have an energy crisis because there is no plan to satisfy America’s need for lower cost fuels. America’s politicians don’t even have the will power to address the issue. Furthermore, if there is an acceleration of oil prices, then welfare and entitlement costs, along with a decline of GDP, will devastate Federal and State budgets. It does not matter. Republican, democrat, socialist or conservative. There will not be enough money to fund the promises of America’s political establishment.
The Bottom Line
As I have pointed out in other essays, oil product consumption is relatively inelastic. Increases in price have a relative correlation to consumption (which can be viewed on an S graph scale). At $74 per barrel, the price of oil has a marginal effect on demand. Most of the people in the three lower income groups, roughly 49% of the American population, can still afford a mobile lifestyle.
Oil at a sustained price of $99 per barrel, however, appears to be a pivotal point in the balance of demand versus price. And as the price of oil rises through $149 per barrel, a growing segment of the consumer population will not have enough money to pay for all the gasoline, diesel, propane, kerosene, heating oil and other oil products they would like to consume. Further, the use of oil based products for agriculture, manufacturing, and transportation gradually becomes prohibitive. Crop yields per acre will decline because (as happened in 2008 +) farmers cannot afford to use as much fertilizer or plant and soil amendments. This guarantees higher food prices and increased food insecurity. Goods will become more expensive, and transportation costs will soar (especially for airline travel).
Think increased rates of inflation.
As the price of motor fuels and household heat go up, expect a growing dissatisfaction, frustration and anger with Federal and State politicians who have failed to develop an adequate response to the fuels and mobility needs of lower income households. And the old political solutions may not work. America cannot afford the cost of a meaningful personal transportation subsidy, nor can it pay enough welfare to compensate for the dramatic effect of higher oil prices.
As the price of oil rises, the Law of Unequal Distribution shows us that households with a disposable income of less than $50,000 (~ 49% of American households) will be forced to make serious adjustments to their spending on personal transportation in order to balance the budget.
But there is a thin line between having enough cash to buy fuel, and not having enough money to survive from one paycheck to the next. The official rate of inflation masks the real world costs of current consumption. Since existing government policy favors increasing the cost of coal, oil, natural gas, nuclear energy, hydropower, and green energy, there is no upper limit to the inflationary impact of these policies.
How soon will fuel prices become a serious political issue? When does constant exposure to frigid temperatures lead to illness? Frustration? Anger? Where is the breakpoint of rebellion? Which political theology will be the most appealing? Which political system is most likely to provide a practical solution?
Obviously something has to give. The consumer will have to make choices. Shoes for the kids or gasoline for the car? Meat on the table or fuel for heat? Make an impulse purchase at Wal-Mart or pay the rent? It's going to be rough.
Right now, as you read this essay, the folks are not happy. It will get worse.
Ronald R. Cooke
The Cultural Economist