Center for American Progress

Squeezed at the Pump: Higher Oil Prices Depress Wages, Consumption

A Progressive Response to High Oil and Gasoline Prices

Oil prices have risen to extraordinary heights-now approaching $70 per barrel-and higher oil prices have led to a price jump at the gas pump, including a fifteen cent increase since the end of July alone. Middle-class families' pain, however, was oil companies and executives' gain. Oil companies posted record profits and oil executives saw the largest pay increases of any group of executives in 2004. To add insult to injury, policymakers rewarded oil companies with billions of dollars in tax breaks and subsidies in the recent energy bill, while offering little relief for middle-class families.

For the past 18 months, oil prices and gas prices have been rising quickly. Back in the summer of 2004, oil prices hovered around $40 a barrel. According to the Energy Information Administration, consumers paid about $1.85 per gallon of gas back then. Now oil tops $67 a barrel and gas prices average $2.50. This is a 168 percent increase for oil and a 135 percent growth for prices at the pump within just a year and a half. To put this in perspective, last August, gas cost $1.87 per gallon. At that level, a person would spend an average of about $900 per year driving a typical car an average number of miles. At current prices that same person would have to shell out an extra $300 for the same mileage or drive 3,500 fewer miles.

Price increases are even more pronounced in some cities. In San Francisco, a gallon of regular gasoline costs $2.76, 26 cents more than the national average.

With oil prices showing no signs of slowing, oil companies are enjoying highly lucrative years. Last year, ExxonMobil reported a profit of over $25 billion, breaking all previous records. Profits were up for other oil companies as well, including Shell with $18.54 billion, ConocoPhillips with $15.7 billion, BP with $15.7 billion, and ChevronTexaco with $13.3 billion. Second quarter 2005 profit figures show that the trend continued in 2005. Profits were between a third and a half higher than during the same period last year. Exxon has already made $7.6 billion this year, BP $6.7 billion, and Shell just over $5 billion. High profits also padded oil executives' pay with an average raise of 109 percent in 2004, according to The Wall Street Journal. The average oil executive received total compensation of $17 million in 2004.

At the same time, middle-class Americans feel a growing squeeze from higher gas prices. On Tuesday, the Bureau of Labor Statistics reported that inflation-adjusted weekly earnings fell in July by 0.2 percent while prices at the pump simultaneously broke through the $2.50 mark in many parts of the country, mirroring an 18 cent increase from the previous week alone – the largest weekly increase since January.

High gas prices contribute to the troubles of a middle class already weighed down by growing costs for education, housing, and health care. Almost six in 10 people report that higher prices cause hardship, including 15 percent who categorize the hardship as "serious," according to a recent Gallup poll. Although the price increase is felt most strongly by low-income families, it also affects many middle-class families. Among households earning between $30,000 and $50,000 per year, 55 percent said they would cut back on driving and 40 percent said they would rein in other spending. According to a survey conducted by the National Retail Federation, more than half of all Americans altered their spending to accommodate higher gas prices. Consumers took fewer vacations, ate out less often, reduced the amount of money spent on clothing, and even bought fewer groceries.

The jump in oil prices, though, goes beyond its effect on consumers. Higher oil prices put pressures on everything from heating costs for school district budgets to the cost of beef. Companies, especially in the manufacturing sector, face a squeeze as they often cannot pass on higher oil prices to consumers. Manufacturers are already rolling back profit expectations due to an underestimated surge in the costs of oil and other raw materials. As companies look for other ways to cut costs, job losses may become more commonplace.

When Congress passed its energy bill recently, it offered little relief to America's struggling middle class. Instead, oil companies received tax breaks and subsidies. The bill provides funding for research and development of new drilling, such as in extremely deep portions of the Gulf of Mexico. Other provisions include $11 billion in tax breaks for oil companies. Representative Edward Markey (D-MA) complained that the bill was "packed with royalty relief, tax breaks, and loan guarantees for the wealthiest energy companies in America even as they are reporting the largest quarterly profits of any corporation in the history of the United States." Further, some analysts also claim that the energy bill won't cut oil imports or lower our dependency on foreign oil reserves. Lastly, the bill does not offer measures to offset the high cost of energy for consumers, unless you count the part that calls for extending daylight savings time by one month. While oil companies enjoy high gas prices, it seems middle-class Americans won't get relief anytime soon.

April Gu is an economic policy research associate at the Center for American Progress.

A Progressive Response to High Oil and Gasoline Prices

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