Energy, Poverty, and America’s Future
America is a very energy hungry country and held the top spot for total annual energy consumption for decades until being recently surpassed by China. It stands to reason that energy prices are highly correlated to poverty and standard of living in any country. If energy prices go up, people’s budgets get squeezed.
Typically, oil and energy prices have been highly correlated to the U.S. business cycle because the country consumed such a large percentage of total oil and energy produced worldwide. Yet, America’s share of global oil demand has shrunk from 33% in 1970 to 22% today. As a result of a weaker correlation to the U.S. business cycle, oil prices have rebounded substantially since the 2009 collapse, yet the U.S. economic rebound has been anemic at best. This reliance on oil and the volatility of oil prices has had a tremendous effect on poverty in the United States.
Recently, the U.S. Census Bureau released statistics about the number of Americans living in poverty. According to the data, the total number of individuals living in poverty grew to 46.2 million, or 15.1% of the population. These numbers are the worst recorded in approximately 50 years. The Peterson Institutue for International Economics calculates that nearly one-third of the increase in poverty can be attributed to the rapid rebound in oil prices.
The increased cost of gasoline at the pump was enough to push just under 1 million Americans into poverty, defined as $11,139 dollars per year in income1 for an individual or $22,113 for a family of four. If oil prices had remained constant at 2001 levels over the past decade, there would be 2.6 million fewer Americans in poverty today and an overall poverty rate of 14.3 percent
The poorest fifth of Americans spend 10.3 percent of their income on oil compared to 2.4 percent for the top fifth.
In addition, we are only estimating the direct impacts of higher oil prices—i.e., the change in what US households spend at the pump. But oil is also an input into a wide range of goods and services consumed by Americans—goods and services that have become more expensive as oil costs have increased.
Unfortunately, 2011 is unlikely to offer much relief. The cost of crude oil to US refineries rose 35 percent year-on-year January through July, up from the 30 percent year-on-year increase in 2010. This has helped accelerate overall consumer price inflation, which reached 3.8 percent year-on-year in August, compared to 1.6 percent during 2010. In the absence of an upside surprise in income growth or a sudden collapse in oil prices in the months ahead, expect another round of depressing poverty numbers this time next year.
NeilS — I know I cringe every time I watch the digital price readout at the pump rapidly inch up, and it appears that I am not alone. Just as my parents used to tell me that they could buy a gallon of gas for 20 cents, now I will be able to tell youngsters that I once purchased gasoline for a dollar per gallon! That seems almost unfathomable now as we are used to paying nearly 4 dollars per gallon. Imagine filling up your fifteen gallon tank for a mere $15.
Unfortunately, this is yet another example of how the poorest individuals suffer the most in a recessionary environment. It is incredible to think that the bottom quintile of earners spends over 10% of their hard earned money just on gasoline costs. Add in rent and food and you may just be tapped out.
This certainly seems like a great justification for weening America off of its dependence on oil. Not only should we be switching to renewable sources in order to stave off global warming, but we should be investing in infrastructure that would allow individuals that are reliant on gasoline-powered cars to have other options. High speed trains, modernized highways, and more fuel-efficient cars would all be solutions that could ease the shock caused by increasingly volatile commodity markets. Some of the greatest innovations of recent history have been achieved from public-private partnerships. Railroads, commercial airlines, semiconductors, space travel, and the internet are but a few. Let us not forget that the government can often be just what the private sector needs when they are too afraid to invest their hoards of cash.