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GND Wave 2.2
High oil Prices Bad
Economy
High oil prices disproportionally hurt marginalized groups
Daren Bakst, 09-27-2022, Former Senior Research Fellow "Who Gets Hurt From High Gas and Diesel Prices? There’s More Harm Than You Think.," Heritage Foundation, https://www.heritage.org/coal-oil-natural-gas/commentary/who-gets-hurt-high-gas-and-diesel-prices-theres-more-harm-you-think,LMS
High gas and diesel prices like those we are experiencing now have sweeping negative economic effects on Americans. Beyond the financial hit at the pump, the economic harm is inflicted in many ways that may not be evident to most.
For example, prices for goods such as food, clothing, and household goods are higher than they otherwise would be since gas and diesel play an important role in supply chains. And there could be higher costs and reduced services for critical functions like police and emergency medical services because of their heavy reliance on fuel to carry out their duties.
Americans have recently experienced this firsthand as prices have skyrocketed. As of the week of September 12, retail prices for regular gasoline averaged $3.69 per gallon, 54% higher than when President Joe Biden took office in January 2021. Diesel prices are 84% higher, averaging just above $5 per gallon. And these are below the record highs we saw this past summer.
The following explains the importance of motor gasoline and diesel in general and highlights just some of the harms caused by these significantly higher prices.
Importance of Motor Gasoline and Diesel
Energy affects almost every facet of American life, and data show just how critical gasoline and diesel are for Americans. One of the most important energy sources is petroleum, which, as the Energy Information Administration explains, has historically been the largest major energy source for total annual U.S. energy consumption. Petroleum is used to create many products, including motor gasoline and diesel, and in 2021, petroleum met around 90% of America’s transportation needs. y Motor gasoline (the most consumed petroleum product) accounted for about 44% of total U.S. petroleum consumption.
Distillate fuel oil, which includes diesel fuel and heating oil, was the second most consumed petroleum product in 2021 at about 29% of total U.S. petroleum consumption. Diesel fuel is used for transportation such as buses, boats, trains, and some cars, but it’s also used for heavy construction equipment, tractors, and electricity generation.
Harm of Higher Prices on American Families
Cars play a central role in the lives of most Americans, enabling them to engage in their daily lives, from going to work and taking their children to school to shopping and visiting relatives. Census Bureau data show that 92% of American households have access to at least one vehicle. Higher gas prices make it more difficult to engage in these ordinary life activities.
Some on the far left have arrogantly dismissed the harm caused by high gas prices. For example, last year, Transportation Secretary Pete Buttigieg captured the left’s electric vehicle elitism when he touted electric vehicles as a solution to high gas prices.
This ignores the high costs and practical problems of electric vehicles. And despite decades of subsidies, according to Department of Energy data, electric vehicles constituted only 0.5% of all vehicles registered in 2021. For example, EV sales in 2021 were very low, accounting for less than 5% of overall vehicle sales.
Regardless of this extreme wish to see the demise of gas-powered vehicles, the reality is that most Americans rely upon motor gasoline to power their cars. High gas prices not only hurt Americans regardless of income level, but they also disproportionately hurt the lowest income households the most because those households spend a greater share of their after-tax income on meeting basic needs, including purchasing gas.
For these lower-income households, the sacrifices they are required to make due to high gas prices may not simply mean giving up luxuries, but also giving up necessities, such as whether to visit the doctor or run the heat in the colder weather.
There’s also evidence indicating that rural households are disproportionately affected by high gas prices. This is due in part because rural Americans have to travel further distances and tend to drive older, less fuel-efficient vehicles. Based on an Iowa State University study, rural households spent 20% more than urban households on gasoline and diesel.
Harm to the Economy
The harm to Americans when filling up their gas tanks is only part of the picture. High gas and diesel prices drive up costs for industries across the economy, and this can lead to consumers incurring some of these costs through higher prices of many goods and services.
One useful example is to look at the trucking industry because of the clear impact diesel prices can have on the industry and the industry’s far-reaching effect on the entire supply chain and economy.
Of the 15 million registered commercial trucks in the United States, 76% are diesel powered. The trucking industry is responsible for transporting approximately 72% of U.S. goods (based on value) or, according to the latest data from the U.S. Census Bureau, “$10.4 trillion of the $14.5 trillion of the value of all goods shipped in the United States in 2017.”
The trucking industry transports goods ranging from pharmaceutical products, plastics and rubber, and vehicle components to meat and poultry.
High diesel costs can hit truckers especially hard since the trucking industry is predominantly comprised of small businesses, with about 92% of motor carriers operating a fleet of six or fewer trucks, and approximately 97% operating a fleet of 20 or fewer trucks.
As truckers have indicated, high diesel prices could significantly reduce their mileage or hours, and in some circumstances, potentially lead them to stop driving altogether. As it is, the American Trucking Associations argued that in 2021, the trucking industry was already short around 80,000 drivers.
Fewer truckers or less driving would increase costs for businesses that utilize truckers to transport their goods (due to basic supply and demand laws). Further, to the extent that truckers can pass on their costs, that would mean higher costs for their business customers who could then pass on the costs to their customers.
Harm to First Responders
The effect on first responders provides a good illustration that the harm of high fuel prices may not always be obvious. Significant fuel price surges could lead police forces to adjust budgets and make cutbacks or reduce the driving of marked cruisers, lessening the police presence in communities. It could also lead police officers to avoid idling their cars in order to conserve on gasoline, which could limit the ability of officers to utilize equipment in their patrol cars like video and audio systems.
Based on interviews with first responders, we know that the fiscal effects can be significant for EMS providers in rural areas. In these regions, first responders travel greater distances and therefore utilize more gasoline. And for some areas where fuel budgets have recently been exhausted, first responders are attempting to handle as many calls as possible over the phone before deploying emergency services.
It cannot be overlooked then that higher prices impact strategy and methodology for first responders.
Conclusion
From the gas used for cars to the diesel used to operate farm equipment and transport goods across the country, the lives of Americans benefit tremendously through these fuels. And when prices surge to especially high levels, this inevitably causes significant harm, especially to the poorest Americans.
For policymakers, any response to high prices should be to remove the many government barriers that drive up fuel prices. At least then, prices would be a reflection of market forces and not government meddling that is causing unnecessary harm
Higher Oil prices mean increased prices everywhere—food, transportation, coal, fossil fuels, GDP
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
1. It is not just oil prices that rise. The cost of food rises as well, partly because oil is used in many ways in growing and transporting food and partly because of the competition from biofuels for land, sending land prices up. The cost of shipping goods of all types rises, since oil is used in nearly all methods of transports. The cost of materials that are made from oil, such as asphalt and chemical products, also rises.
If the cost of oil rises, it tends to raise the cost of other fossil fuels. The cost of natural gas extraction tends to rises, since oil is used in natural gas drilling and in transporting water for fracking. Because of an over-supply of natural gas in the US, its sales price is temporarily less than the cost of production. This is not a sustainable situation. Higher oil costs also tend to raise the cost of transporting coal to the destination where it is used.
Figure 2. US Energy Prices as % of Wages and as of GDP. Ratio to GDP provided by EIA Short Term Economic Outlook – Figure 27, converted to Wage Base by author, using same wages as described for Figure 3.
Figure 2 shows total energy costs as a percentage of two different bases: GDP and Wages.1 These costs are still near their high point in 2008, relative to these bases. Because oil is the largest source of energy, and the highest priced, it represents the majority of energy costs. GDP is the usual base of comparison, but I have chosen to show a comparison to wages as well. I do this because even if an increase in costs takes place in the government or business sector of the economy, most of the higher costs will eventually have to be paid for by individuals, through higher taxes or higher prices on goods or services.
They’re long term—relying on recession
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
2. High oil prices don’t go away, except in recession.
We extracted the easiest (and cheapest) to extract oil first. Even oil company executives say, “The easy oil is gone.” The oil that is available now tends to be expensive to extract because it is deep under the sea, or near the North Pole, or needs to be “fracked,” or is thick like paste, and needs to be melted. We haven’t discovered cheaper substitutes, either, even though we have been looking for years.
In fact, there is good reason to believe that the cost of oil extraction will continue to rise faster than the rate of inflation, because we are hitting a situation of “diminishing returns”. There is evidence that world oil production costs are increasing at about 9% per year (7% after backing out the effect of inflation). Oil prices paid by consumers will need to keep pace, if we expect increased extraction to take place. There is even evidence that sweet sports are extracted first in Bakken tight oil, causing the cost of this extraction to rise as well.
They lead to recession
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
4. Spikes in oil prices tend to be associated with recessions.
Economist James Hamilton has shown that 10 out of the last 11 US recessions were associated with oil price spikes.
When oil prices rise, consumers tend to cut back on discretionary spending, so as to have enough money for basics, such as food and gasoline for commuting. These cut-backs in spending lead to lay-offs in discretionary sectors of the economy, such as vacation travel and visits to restaurants. The lay-offs in these sectors lead to more cutbacks in spending, and to more debt defaults.
Direct correlation to house prices
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
6. Housing prices are adversely affected by high oil prices.
If a person is required to pay more for oil, food, and delivered goods of all sorts, less will be left over for discretionary spending. Buying a new home is one such type of discretionary expenditure.
US housing prices started to drop in mid 2006, according to data of the S&P Case Shiller home price index. This timing fits in well with when oil prices began to rise, based on Figure 1.
Irreparable damages to businesses
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
7. Business profitability is adversely affected by high oil prices.
Some businesses in discretionary sectors may close their doors completely. Others may lay off workers to get supply and demand back into balance.
8. The impact of high oil prices doesn’t “go away”.
Citizens’ discretionary income is permanently lower. Businesses that close when oil prices rise generally don’t re-open. In some cases, businesses that close may be replaced by companies in China or India, with lower operating costs. These lower operating costs indirectly reflect the fact that the companies use less oil, and the fact that their workers can be paid less, because the workers use less oil. This is a part of the reason why US employment levels remain low, and why we don’t see a big bounce-back in growth after the Great Recession. Figure 4 below shows the big shifts in oil consumption that have taken place.
Figure 4. Percentage growth in oil consumption between 2006 and 2011, based on BP’s 2012 Statistical Review of World Energy.
A major part of the “fix” for high oil prices that does takes place is provided by the government. This takes place in the form of unemployment benefits, stimulus programs, and artificially low interest rates.
Efficiency changes may provide some mitigation, as older less fuel-efficient cars are replaced with more fuel-efficient cars. Of course, if the more fuel-efficient cars are more expensive, part of the savings to consumers will be lost because of higher monthly payments for the replacement vehicles.
Messes with already tight state budgets
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
9. Government finances are especially affected by high oil prices.
With higher unemployment rates, governments are faced with paying more unemployment benefits and making more stimulus payments. If there have been many debt defaults (because of more unemployment or because of falling home prices), the government may also need to bail out banks. At the same time, taxes collected from citizens are lower, because of lower employment. A major reason (but not the only reason) for today’s debt problems of the governments of large oil importers, such as US, Japan, and much of Europe, is high oil prices.
Governments are also affected by the high cost of replacing infrastructure that was built when oil prices were much lower. For example, the cost of replacing asphalt roads is much higher. So is the cost of replacing bridges and buried underground pipelines. The only way these costs can be reduced is by doing less–going back to gravel roads, for example.
Decks growth
Gail Tverberg, 1-17-2013, retired US actuary and writer for Our Finite World, , "Ten Reasons Why High Oil Prices are a Problem," Our Finite World, https://ourfiniteworld.com/2013/01/17/ten-reasons-why-high-oil-prices-are-a-problem/,LMS
10. Higher oil prices reflect a need to focus a disproportionate share of investment and resource use inside the oil sector. This makes it increasingly difficult to maintain growth within the oil sector, and acts to reduce growth rates outside the oil sector.
There is a close tie between energy consumption and economic activity because nearly all economic activity requires the use of some type of energy besides human labor. Oil is the single largest source of energy, and the most expensive. When we look at GDP growth for the world, it is closely aligned with growth in oil consumption and growth in energy consumption in general. In fact, changes in oil and energy growth seem to precede GDP growth, as might be expected if oil and energy use are a cause of world economic growth.
Figure 5. Growth in World GDP, energy consumption, and oil consumption. GDP growth is based on USDA International Macroeconomic Data. Oil consumption and energy consumption growth are based on BP’s 2012 Statistical Review of World Energy.
The current situation of needing increasing amounts of resources to extract oil is sometimes referred to as one of declining Energy Return on Energy Invested (EROEI). Multiple problems are associated with declining EROEI, when cost levels are already high:
(a) It becomes increasingly difficult to keep scaling up oil industry investment because of limits on debt availability, when heavy investment is made up front, and returns are many years away. As an example, Petrobas in Brazil is running into this limit. Some US oil and gas producers are reaching debt limits as well.
(b) Greater use of oil within the industry leaves less for other sectors of the economy. Oil production has not been rising very quickly in recent years (Figure 6 below), so even a small increase by the industry can reduce net availability of oil to society. Some of this additional oil use is difficult to avoid. For example, if oil is located in a remote area, employees frequently need to live at great distance from the site and commute using oil-based means of transport.
Figure 6. World crude oil production (including condensate) based primarily on US Energy Information Administration data, with trend lines fitted by the author.
(c) Declining EROEI puts pressure on other limited resources as well. For example, there can be water limits, when fracking is used, leading to conflicts with other use, such as agricultural use of water. Pollution can become an increasingly large problem as well.
(d) High oil investment cost can be expected to slow down new investment, and keep oil supply from rising as fast world demand rises. To the extent that oil is necessary for economic growth, this slowdown will tend to constrain growth in other economic sectors.
High oil prices decks GDP
Mathias Drehmann, Mikael Juselius, Anton Korinek, et al 3-6-2012, Brookings journalists, "How Higher Gas Prices Hurt Less Affluent Consumers and the Economy," Brookings, https://www.brookings.edu/articles/how-higher-gas-prices-hurt-less-affluent-consumers-and-the-economy/,LMS
With rising gas prices now rivaling unemployment as a key issue in this year’s election, both the president and his Republican opponents have been speaking out about what, if anything, should be done. Republicans argue that the nation needs more domestic oil and gas production while the president notes that oil is produced and sold on world markets, meaning that domestic supplies have a small impact on prices. That said, rising gas prices do affect both consumers and the economy adversely, and they are especially harmful to lower- and moderate-income households.
One assumption is that these households do not all own cars, that many use mass transit instead. Looking at all households with annual incomes less than $

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