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)
[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).