Can Americans Handle $150 Oil?

The International Energy Agency said Europe could “cope” with a supply shortage brought on by a drop in imports of crude from Iran, but that prices might temporarily reach near the $147 a barrel peak of 2008. The chief of large energy firm Vitol told the Financial Times that crude could reach and stay at $150. It is not entirely possible to determine what oil at $140 or $150 would do to the average American household budget, but a look at Census data suggests that the effects would be harsh.

The Consumer Expenditure Survey done in 2010 showed that the average consumer unit spent $49,067 in 2009. That unit:

includes families, single persons living alone or sharing a household with others but who are financially independent, or two or more persons living together who share expenses.

The budget for these households was very tight. More than $10,000 went to shelter. Another $6,400 went to food. Over $3,100 went to health care. Another $5,500 went to pensions and Social Security. More than $2,700 went to vehicle purchases.

The Census data showed that in 2009, a consumer unit spent more than $3,600 on utilities, which included heating. Another $2,700 was spent on gas and motor oil.

Crude prices averaged approximately $90 a barrel last year, and in late summer they were below $80. Oil prices at $120 would be a 50% rise from the amount around Labor Day. At $150, the figure is nearly double.

What Americans spend on gas, oil and home heating oil varies widely from place to place and family to family. Urban dwellers may not own cars. Commuters in some places have 50 mile round trips to and from work. People who live in cities are more likely to weather high gas prices than others. But for those others, gas prices at or above $4 a gallon could be catastrophic. For people who drive a car that gets 25 miles per gallon, the cost of a medium length commute could increase by several hundred or even more than $1,000 this year. The government data on consumer spending shows that amount would be a burden, and other items these households buy might not be affordable at all. The Census data shows that entertainment expenditures are $2,700 a year. Apparel is just over $1,700. And food consumed outside the home was just over $2,600. Each of these activities is essential to consumer spending activity, which remains about two-thirds of gross domestic product.

Economists remain worried about what high fuel prices will do to GDP. It is really not that hard to tell. The typical American household budget is not terribly elastic, and consumer spending is about the only area where it has flexibility if energy prices jump.

Douglas A. McIntyre