Rising Gas Prices Threaten To Wipe Out Trump's Tax Cut Benefits

The Trump tax cuts were supposed stimulate growth, and while conventional wisdom held that it would be the US economy that would be boosted, it now appears that only US oil companies, or rather their shareholders (and the occasional OPEC member) will get the benefit of the extra cash jolt.

The reason: sharply higher oil prices, which today settled at a fresh 4 year high, are dragging gasoline prices across the country higher, and are rapidly approaching the psychological $3/gallon level, last seen in late 2014, just before the "OPEC Thanksgiving massacre" of 2014.

To some, the rising prices are merely a nuisance of life. Take Tim Rogus, a retired publisher in suburban Chicago, who told the FT he noticed fuel prices at the petrol station creeping up towards $3 a gallon but he is philosophical about it. “Our prices were nearly $4 at one point,” he says. “Life has to go on somehow.”

To others, especially those in the lower income quintiles, the rising gas prices will be a far bigger burden as it will mean a sharp drop in discretionary spending. now that more cash has to be set aside for essentials. Here, the FT is correct that it will be most rural areas and middle-income households that are about to be hit the hardest.

Worse, it means that the benefit of Trump's tax cuts for the middle class will be mostly, if not fully wiped out.

To be sure, it will take a while for the effects of higher oil/gas prices to be fully felt: the “driving season”, the peak of petrol consumption in the US, is April to September, and the EIA expects prices this summer to be at their highest for four years, up 10 per cent from 2017. Of course, for that to happen, US households will need to significantly curb their spending on other items, which means the weakness in retail sales for a US population whose personal savings rate is already near all time lows, will persist.

However, unlike the last time gas prices soared - most notably in early 2008, just before all hell broke loose - this time there is a silver lining: the US shale industry, which produces more oil the higher prices rise.

"Ten years ago, White House economists looking at gross domestic product and job creation would be quite concerned if oil prices rose significantly,” saidJason Bordoff who leads the Center on Global Energy Policy at Columbia University. “It’s a different world now."

When oil prices fell sharply after the summer of 2014, the net stimulus to the US economy was “effectively zero”, wrote economists Christiane Baumeister and Lutz Kilian in a Brookings paper in 2016. The boost to consumers from cheaper fuel was cancelled out by a slump in investment in the oil industry. As oil prices rebound, the overall impact on US growth is similarly likely to be very small, Mr Kilian says.

So how will rising gas prices be transmitted across the economy this time? Here's the math - an inverse of the "gas savings" exercise we did back in 2015: according to the Urban-Brookings Tax Policy Center, Americans will spend an average of $400 per household more on fuel this year than in 2016, as the rebound in crude prices is reflected in the cost of petrol at the pump. By contrast, middle-income US households will on average gain $930 each from the tax cut bill passed at the end of last year.

The problem is the non-homogeneous distribution of the middle class, and as the following table from Deutsche Bank shows, lower income households are hit far more by rising gas prices than they benefit from tax cuts, and vice versa on for high income households.

Another way of visualizing how the composition of spending by US consumers will be impacted, is shown in the chart below, which lays out the share of spending on gas as a portion of the total household budget.



What the chart above shows is that the hardest hit will be middle-income households. While cheaper oil handed a windfall to those households in the middle quintile, more than half of which was spent, now as much as half of that boost will be withdrawn.

As the FT further notes, rural households spent about 16% more on petrol on average than urban households in 2016. Fuel accounted for 4% of total household spending for middle-income Americans, but only 2.6% for the highest earning fifth.

And while the peak impact will be felt this summer when gasoline prices rise the most, there are already indications that higher fuel costs are having an adverse impact. US retail sales excluding fuel, food and cars have been mostly flat since November.

But while the US economy in general will lose, some will benefit: among them is the ongoing boom in are the various hotspots of the shale industry in places such as west Texas, where truck drivers are being hired for $100,000 per year, a boom which is funded by consumers.

So with higher prices, and potentially rising shale supply, will demand also be impacted? For now, few expects a drop-off in demand. According to an EIA forecast, petrol consumption is likely to be higher this summer than it was last year, although if there is one thing one can say with certainty about EIA predictions, is that they are almost always wrong.

“People aren’t going to start cancelling trips with gasoline at $2.75, and probably not at $2.95,” says Tom Kloza, head of research at Oil Price Information Service. “If the economy keeps chugging along, you’ll have to see more than 25 cents more on the price before you see a significant demand response.”

Ok, Tom, so at what price will people start canceling trips? And if travel plans remain, it means that spending on other, non-essential items - those which were expected to get a boost from the Trump tax cut - will be shelved.

The bottom line: anyone expecting a sharp bounce in US output, GDP and/or inflation, which in turn may prompt the Fed to hike taxes faster, will be disappointed.

Comments

bshirley1968 peopledontwanttruth Wed, 04/18/2018 - 20:25 Permalink

You can bet your sweet ass that the "cost" of the tax cut will always be more than the benefit. Only those "receiving" taxes benefit from tax cuts.....in the long run.

$4 a gallon gas will crush this zombie economy. The dollar is way overvalued. Gold should be $8000 - $10,000 an oz., silver should be $150 per oz., gas should be $6 a gallon, bread should be $6 a loaf, eggs $4 a dozen, and the average American worker should be making $20 an hour.....not a mandated minimum wage.....but a min average of $20 an hour. Can't live a decent life on less than that.

In reply to by peopledontwanttruth

Mr. Ed zero_pussy Thu, 04/19/2018 - 07:39 Permalink

No, I think you can thank Trump's buddy Tillerson, the OIL GUY.  What the hell was he doing as Secretary of State!?  I think he was going around the globe arranging some kind of under-the-table understanding to gin-up demand that isn't or certainly wasn't there before he showed up.  What might he have done?  One possibility: he arranged for large (or much larger than otherwise) purchases of oil at very low prices to puff up demand (wouldn't take much)... the over-all effect would be a big net boost in profits for all oil players since everyone is conditioned to believe that oil price is so very, very sensitive to supply-demand balance.  I call bullshit on everything I'm seeing.

Corruption is endemic.

In reply to by zero_pussy

snblitz bshirley1968 Wed, 04/18/2018 - 23:45 Permalink

What would have happened if we took $1 trillion of the $6 trillion spent in the Middle East wars and bought 400 new nuclear reactors to add to the existing nuclear plants around the country (US)?

I suspect oil would be $10 a barrel.

And maybe those 5 deaths over the last 20 years related to US nuclear energy would be closer to 25.

Maybe we could build a few breeder reactors like the French have that reprocess spent nuclear fuel into new nuclear fuel?

In reply to by bshirley1968

swmnguy snblitz Fri, 04/20/2018 - 09:29 Permalink

Right now, counting all departments and the off-book spending, the USA spends over $1 Trillion per year (!!??!!) on the War Machine and the Wars of Empire.

If we were to finally come to our senses and heed Eisenhower's advice, we could slash a zero off that budget hemorrhage and be much safer, as all our enemies come as a result of our Imperial adventures.

And $900,000,000 per year would do a lot of things around the ol' Homeland.  We could build Thorium reactors and slash our dependence on obsolete energy sources one year.  We could fix our crumbling infrastructure in 3 or 4 years.  We could fix our collapsing healthcare finance system and schools another year.  We could fix Social Security, Medicare, welfare in general, and affordable housing issues another year.  We could pay off the national debt, which only exists today due to military overspending.  Within a decade, we could fix America's fiscal and structural problems.

But a small number of Oligarchs would be inconvenienced, and a lot of Americans would have to find productive work.  There would be plenty, and the work we'd be doing would have a multiplier effect that would kick-start the biggest boom in American history.  But Oligarchs don't like having their gravy train disrupted, so we're not going to do that.  Instead, we'll spend our economy into the ground on the military, create new enemies around the globe, force our adversary to unite against us, and drive away our allies.  

Sad.

In reply to by snblitz

brushhog FreeShitter Wed, 04/18/2018 - 19:07 Permalink

Will Americans cut back on spending or just go further into debt? I dont think we see the results of these things play out for a long time....spending doesnt really go down right away, the credit card charges absorb it and then we see waves of defaults and bankruptcies years later. The cause and effect are too complex, they can never hope to really understand the consequences of anything.

In reply to by FreeShitter

Bemused Observer brushhog Fri, 04/20/2018 - 10:37 Permalink

Things like interest rates and easy credit don't decide the spending, it is the mindset of the consumer that does. Although the financial whiz-kids claim their policies 'enable' the consumer to keep playing, in fact that consumer has ALREADY DECIDED to spend...the easy-money just helps them do it bigger and badder. But the day they change their minds and snap the wallets closed, all the tax cuts and 'free money' policies in the world won't open them up again, not for a long time.

And, there are the normal cyclical spending fluctuations that ebb and flow with the consumers available spending money, but a TRUE austerity on the consumer end is a very different thing. A very nasty and long-lived thing, that sucks the life out of an entire generation. Instead of a scenario where you have people competing with the 'Jones's' to SPEND, now the contest becomes all about NOT spending, and so it feeds on itself until the next generation reaches maturity and takes over. This is what happened after the Depression, and that generation never recovered their free-spending ways. It was their children that had to get things rolling again.

In reply to by brushhog

nmewn DingleBarryObummer Wed, 04/18/2018 - 20:06 Permalink

Where's Mikey to splain to me how the tax cut adversely effected him? I guess, gone, into the ethereal mist. 

Yes, once and always a monetary phenomenon, nothing more. But I would have been interested in his interpretation of Simon Kuznets modeling of GDP in which he admonished .gov to NOT take as it's sole indicator.

Naturally, they ignored him and the rest as they say is, historical economic voodoo ;-)

In reply to by DingleBarryObummer

bshirley1968 nmewn Wed, 04/18/2018 - 20:17 Permalink

Tax cuts = massive budget deficits = urge to raise revenue through bullshit tariffs = higher prices on everyone = "bigger" corporate profits.

Want me to run another scenario for you?

"Tax cut" is a major joke played on the average citizen. No body gets a "break", the give a little here and take more there. The sonsofbitches are already broke and living on debt. Just how in the hell are they going to give anyone a "Tax cut"? Go troll that!

In reply to by nmewn

swmnguy Frilton Miedman Fri, 04/20/2018 - 09:35 Permalink

My accountant advised me to prepare for an effective tax hike next year.  My youngest brother is an attorney in a small town; his accountant advised him the same.  We both run small businesses.  I have no employees but my brother has 7 employees.

Nobody "on the ground" has really game-planned the effects of the tax bill (not "tax cuts," but "tax bill") yet so it remains to be seen.  Now that 2017 taxes are mostly filed, I expect my accountant to look to 2018 taxes, and then I should hear more.  

But I've long since understood that when it's billed as a tax cut for the middle class to unleash small business, it means it's a bonanza for the Oligarchs, and another massive transfer of wealth from the working poor and middle class upward to the Elites.  At least, that's what it's always been in the 35 years I've been working.  When I was dirt-poor and could barely pay rent and feed myself, I didn't pay income tax (just sales, payroll, excise, property taxes whether renting or owning, and fees) so the propaganda didn't affect me anyway.  Now that I pay a lot in income tax, though the propaganda is directed at me, now I know better.

In reply to by Frilton Miedman

DingleBarryObummer Wed, 04/18/2018 - 18:54 Permalink

yes, this will hurt the already fragile brick and mortar retail.  Another dollar in gas per gallon could be the headwind to keep you home shopping online instead of the m̶o̶n̶k̶e̶y̶ ̶c̶a̶g̶e̶s̶ shopping mall.

Golden Showers Wed, 04/18/2018 - 18:55 Permalink

If gas gets cut with ethanol and cocaine gets cut with talc, will the tax cut cut my cut?

Raising minimum wage will increase our income? It's not what you cut, it's who gets the profits and subsidies. You get fucked.

bshirley1968 Golden Showers Wed, 04/18/2018 - 20:46 Permalink

Right on, brother.

We are wasting oil manufacturing ethanol. Tell someone we use more than a gallon of fuel bringing a gallon of ethanol to market and watch their eyes glaze over.

Without subsidies there would be no ethanol, no wind energy, no solar energy. No subsidies and food would find a real price point and people wouldn't have time and energy for stupid shit like "keeping up with the Kardashians".

80% of the world spends 80% of their time figuring out how to feed themselves. A big dose of that reality would be good for Americans. Stop a lot of bullshit like Antifa rallies, anti gun rallies, and school shootings. People thinking about how to get some food in their belly tonight don't have time to think about changing their dick into a vagina or whether their car has auto pilot or not. When you live in reality, you don't have time to sit around watching it on teevee.

In reply to by Golden Showers

Quantify Wed, 04/18/2018 - 18:57 Permalink

There is no correlation between the 2. One is what the government charges you for services and social support, the other is a commodity based on world consumption. It's idiotic trying to tie them together.

bshirley1968 Quantify Wed, 04/18/2018 - 20:53 Permalink

Want to see idiotic? Read what you just wrote.

Supply and demand haven't had shit to do with the price of oil since 1972.

If the price of oil was based on demand alone it would be worth $400 a barrel.....minimum. We use 19 million+ barrels a day and without it we go back to the stone age. In 1930, for every barrel invested in the oil patch we got 80 back, today we get less than 5. So it would appear demand has skyrocketed and "supply" has crumbled.

When the dollar corrects some more in the near future, you'll see demand go down and the price go through the roof.....simultaneously. Wake up sheeple.

In reply to by Quantify

arby63 Wed, 04/18/2018 - 19:00 Permalink

Shit, how is this article (in a long list of examples) any different than Quinn's review of the Fourth Turning concept?

Shit always sucks. It just sucks more when you have little control over your destiny.

To Hell In A H… Wed, 04/18/2018 - 19:04 Permalink

More tax cuts by Orange Jesus, will stimulate the economy and the savings will then be ploughed back into R&D and creating new jobs, not into dividends as before the corporations plead. How fucking dumb can the lumpenprole get?

adr Wed, 04/18/2018 - 20:30 Permalink

There is no such thing as the summer driving season. Everything is estimated seasonally adjusted bullshit.

Oil is $65. On the way down $75 oil gave us $1.85 gas but now on the way up $65 oil gives us $2.85 gas. Bullshit.

Oil inventory didn't decline, it was just shipped off the books thanks to exports 400% higher than last year.

I'll take $70 oil with $1.75 gas. Anything over that is hooked nose extortion.

 

snblitz Wed, 04/18/2018 - 23:30 Permalink

I swapped my gas engine chevy 3/4 ton (14 miles per gallon), for a Ram 1/2 ton eco-diesel (22 mpg) giving myself a 30% discount on fuel.  So far the increase in diesel prices is not bothering me.

However, California raising the diesel (+20 cents) and gas (+12 cents) taxes because we all went out an bought fuel efficient vehicles is pissing me off.

And they are raising it more in 2019. A total of 58.3 cents per gallon in gas taxes.  More for diesel.

Oh, and diesels have to have smog checks (they used to be exempt). And that even though modern light duty diesels do not produce any pollution at all thanks to SCR/DEF pollution recovery systems.  Just another $70 bucks a year in taxes.

And don't snicker because you aren't a Californian.  If you eat California produce you are paying the fuel taxes too.

And they are coming for electric car owners too.  An additional $100 in annual registration to offset the per gallon gas tax loss.