Senate Democrats

The Impact of High Fuel Prices on the American Economy and Businesses

Gasoline prices broke records nationally and in 20 states this month.  High prices are increasingly taking a toll on American businesses and on the economy.  Senate Democrats have introduced legislation, S.1419, to increase our energy independence,  strengthen the economy, reduce global warming emissions, and protect consumers.

The Impact on the Economy

Increasing overall prices.  Energy prices contributed to increases in the Consumer Price Index this year.  During the first four months of 2007, consumer prices have risen 4.8 percent.  This rate compares to a 2.5 percent rise in all of 2006.[1]  Although the core inflation rate (excluding food and energy prices) has slowed, one economist points out that is good news “only if you don’t use energy or eat food.”[2]

Increasing our trade deficit.  Americans spent $291 billion in 2006 on oil and petroleum product imports and sent $111 billion to OPEC countries for imports of crude oil.[3]

Losing jobs.  On average, every time oil prices go up 10 percent, 150,000 Americans lose their jobs.[4]

Economic growth held back.  Every time oil prices increase by 10 percent for a sustained period of time, we lose somewhere between $26 billion and $142 billion in economic growth.[5]   Overall economic growth in the United States slowed to only 1.3 percent in the first three months of this year, the slowest pace in four years.[6]

Spurring fear of a recession.  Wholesale prices surged 0.7 percent in April after a one percent increase in March due to large increases in gasoline costs for the three previous months.  If prices continue to increase and troubles in the housing market deepen, economists worry that the country could move toward a recession.[7]

The Impact on Businesses

Hurting retail business.  Increasing gasoline prices are eating up middle-class consumers’ spending money, which particularly hurts retail businesses.  Retail sales fell 0.4 percent in April when sales from fuel stations are excluded.[8]  The CEO of Zale Corporation, a jewelry retailer, cited the impact of high gas prices as a major factor in the company’s first quarter losses.[9]  About 15 million Americans are employed in retail trades.[10]

Increasing costs for manufacturers.  Energy costs are often the third-largest single expense for manufacturers, behind labor and materials.  According to the National Association of Manufacturers, spending on energy “has gone from an often ignored line item to a large, unpredictable cost with a significant impact on an organization’s bottom line.”  In today’s competitive environment, manufacturers cannot simply pass on increased costs to consumers.[11]

Squeezing small businesses.  In a survey conducted in June 2006, 75 percent of small businesses said that increasing energy costs had moderately or significantly impacted their businesses.  Twenty-eight percent of the small businesses surveyed had to increase the prices they charged their customers, and others coped by effectively limiting production.[12]  Energy costs are even higher today than they were a year ago when this survey was conducted.

Eating into profit margins of small contract businesses.  Businesses that contract out their services are often unable to recover increased energy costs on projects once contracts are signed.  Rising energy costs also increase costs of labor and materials, and they chip away at these businesses’ profit margins, stifling growth.[13]

Diesel fuel price at historically high level.  The retail price of diesel fuel hit its highest monthly level ever at $3.15 per gallon in October 2005.  Since then, diesel prices have remained high, and prices this summer are expected to average $2.89 per gallon.[14] 

Airline operating costs soaring.  Historically, fuel has accounted for between 10 and 15 percent of U.S. passenger airline operating costs.  Currently, fuel makes up 20 to 30 percent of operating costs.  Every penny increase in the cost of jet fuel costs the U.S. airline industry $190 to $200 million annually.[15]

Trucking industry’s operating expenses are skyrocketing.  Fuel accounts for a quarter of the trucking industry’s operating expense, or $103.3 billion in 2006, a full $11.5 billion more than the industry spent in 2005.  More than 80 percent of communities in the U.S. get their goods solely by truck.  Each penny increase in diesel costs the trucking industry $381 million over a full year.[16]

Farmers struggle with high input costs.  Even during a good year, farmers operate on profit margins of only about five percent and have no mechanism to pass on increases in input costs.  A study by Kansas State University found that non-irrigated crop production costs have risen from $115 per acre in 2000 to $140 per acre in 2005, an increase of 22 percent.  The percentage of costs that were energy-related also rose from 26 percent in 2000 to 35 percent in 2005.[17]

[1] Bureau of Labor Statistics, Consumer Price Index Summary: April 2007 (May 15, 2007).

[2] Gannett News in USA Today, “Inflation’s bite lets up a bit; But interest rates probably won’t fall anytime soon” (May 16, 2007).

[3] U.S. Census Bureau, U.S. International Trade in Goods and Services December 2006, Exhibit 17 and Supplement Exhibit 3.

[4] According to economists at the Federal Reserve Board and the Universities of Kent and Warwick in the United Kingdom, a 10 percent increase in the price of oil will likely increase the unemployment rate by 0.1 percent over the course of the following year.  According to the Bureau of Labor Statistics, there are currently 151,000,000 non-farm payroll employees in the United States.  Therefore, a 0.1 percent increase in unemployment means a loss of 151,000 jobs.  Source: Alan Carruth, Mark Hooker, and Andrew Oswald, “Unemployment Equilibria and Input Prices: Theory and Evidence from the United States,” The Review of Economics and Statistics, v. 80, n. 4, 1998, p. 621.

[5] Congressional Research Service (CRS) Report RL31608, “The Effects of Oil Shocks on the Economy: A Review of the Empirical Evidence.”  According to survey of relevant literature conducted by CRS, a 10 percent increase in oil prices, sustained for a 3-month period, will likely reduce GDP growth by 0.2 percent to 1.1 percent over the next year.  According to the CIA World Factbook, U.S. GDP in 2006 was $12.98 trillion.  Therefore, a 0.2 to 1.1 percentage point reduction in the economic growth rate would result in a $26 billion to $142 billion drop in economic growth over the next year.

[6] Associated Press, “Gas Prices a Drain on Consumer Dollars” (May 11, 2007); Bureau of Labor Statistics, Producer Price Index April 2007 (May 11, 2007)

[7] Ibid.

[8] Associated Press, “Gas Prices a Drain on Consumer Dollars” (May 11, 2007); U.S. Census Bureau, Advance Monthly Sales for Retail Trade and Food Services: April 2007 (May 11, 2007).

[9] Los Angeles Times, “Zale Cites High Fuel Prices for Loss” (May 23, 2007).

[10] Bureau of Labor Statistics, Employment Situtation Summary: April 2007 (May 4, 2007).

[11] National Association of Manufacturers, “America’s Business: Managing Energy is Key as a Strategic Business Concern” (February 15, 2007).

[12] Survey by the National Small Business Association (July 28, 2006).

[13] Testimony of Sylvia Estes before the House Select Committee on Energy Independence and Global Warming (May 9, 2007).

[14] Energy Information Administration, Short Term Energy Outlook (May 8, 2007).

[15] Air Transport Association, “Energy/Fuel” (May 2007).

[16] American Trucking Association, “Fuel Talking Points” (May 14, 2007).

[17] U.S. Department of Agriculture and Cantwell staff phone conversation with the American Farm Bureau; Testimony of Donn Teske, Kansas Farmers Union, before the House Select Committee on Energy Independence and Global Warming (May 9, 2007).

Bookmark and Share