Energy Policies and Potential Impacts on Household Budgets
Posted February 16, 2021
Most people get riled up when energy costs rise, especially prices at the pump. It’s understandable; energy represented 6.5% of household expenditures in 2019, per the U.S. Bureau of Labor Statistics’ Consumer Expenditure Survey. Yet, as we’ll see, energy policy choices can affect far more than just what you pay for a gallon of gasoline or your monthly electricity bill.
For example, imagine how you would feel if you learned that U.S. energy policies materially raised the cost of houses and vehicles, in addition to the fuel they require, the costs of which have been on the rise. Those two together plus energy represent more than half of a typical household’s expenditures.
Higher energy costs could result from the Biden administration’s decision to halt new federal natural gas and oil leasing, potentially reducing domestic production, as well as possible moves on the regulatory front and other actions that could limit drilling or hydraulic fracturing. Policies such as these could put upward pressure on energy costs that then would ripple across the broader economy since virtually all economic activity has an energy component.
This looms over an economy where, for example, vehicles and housing have recently become less affordable for typical U.S. households:
- New vehicle sales show the pandemic economy favored the rich while the working poor struggled.
- Consumers facing difficult choices, seen in this article explaining why a patient might choose to buy a $40,000 car but not opt for a life-changing smile. (Because Americans increasingly finance the vehicle based on the monthly payment, rather than the equivalent cash cost.)
- COVID-related difficulties affording home mortgages despite record-low interest rates
- Americans are flocking to the suburbs, as rising housing costs have made home ownership in urban centers beyond the reach of Americans in many states.
- Nearly 20% of renters in America are behind on their payments as of January 2021 by an average of $5,600 or roughly four months of rent.
As I said, higher underlying energy costs would not help to alleviate these conditions.
Now consider the potential costs of electric vehicles and charging infrastructure, which the administration is signaling; the ratcheting up of fuel economy standards that the auto industry suggested in January would cost more than $1 billion annually; plus incentives and/or state requirements like that in California which mandates residential solar panels on new construction and has been estimated to add $8,400 to the cost of a single-family home.
To be clear, we’re not against higher energy efficiency where it is cost effective in markets and chosen by consumers. However, with the potential policies I just listed, we’re talking about blanket regulations and mandates that effectively favor certain technologies over others for vehicles or homes. Ostensibly, these would be intended to foster progress and innovation, but they could raise consumer prices further. Since 60% of American households already spent as much or more than their income after taxes in 2019, this point should hit home for most people not named Bezos, Gates or Musk.
Higher costs for housing, vehicles and energy could ultimately require making sacrifices in the American way of life. This might be the objective of those who oppose fossil fuels and advocate for changes at almost any cost, but it deserves to be discussed openly and in the context of how issues of economic prosperity are interconnected, what’s affordable to households and who’s paying the bill.
Let’s quantify some things and show how energy consumption and household spending in total (not just on energy) are interrelated because of the ways our homes, transportation systems and the American lifestyle are structured.
Households helped by lower energy costs
Lower energy costs over the past decade have been a relief value for increased U.S. expenditures on other essentials. U.S. household expenditures on energy fell by nearly 15% over the past decade as those on food, education and healthcare rose by 27% to 75%, according to the Bureau of Labor Statistics (BLS). While the latest data are from 2019, the consumer price index suggests that the divergence in expenditures likely went further in 2020 as energy costs fell by another 8.2% year over year (y/y), while those for medical care (+4.1% y/y), food (+3.4% y/y) and tuition (+1.8% y/y) rose.
The majority of spending in these areas is essential, so lower energy costs have helped households afford higher outlays for food, education and healthcare. With U.S. average annual household expenditures of $63,036 in 2019, a real $677 extra per household due to lower energy outlays was beneficial and should not be taken for granted.
Spending outpacing income
There is a key dividing line in American family finances. In 40% of U.S. households, Americans make more than they spend. For the other 60% the opposite is true. By the numbers in 2019, the lowest 40% of U.S. households based on income outspent their after-tax income, and the middle 20% spent all of their after-tax income, again per the BLS Consumer Expenditure Survey.
So, if the costs of housing, transportation and energy rise substantially, this could place the majority of households between a proverbial rock and hard place.
Analyzing household spending
When we compare how household expenditures over past decade (2009-2019) changed across income brackets, we observe that:
- Lower energy costs benefitted everyone roughly proportionately across household income brackets, ranging from 10% to 15% lower across every income bracket (20% quintiles) over the period. Everyone needs energy and generally spent less on energy as abundant domestic U.S. energy production grew and exerted downward pressure on prices over the past decade.
- Non-energy expenditures on housing (excluding energy costs) and vehicles, maintenance, insurance and public transit represented 44% of household outlays in 2019, each of which grew faster than the rate of broad consumer price inflation between 2009 and 2019. Add energy expenditures to these, and these categories represent more than half of typical U.S. household spending.
- Those who can least afford to spend more have had the greatest increases in their non-energy housing and transportation-related expenditures.
Specifically, the lowest 40% of U.S. households by income had real expenditures on housing (excluding energy) that rose by about +10% between 2009 and 2019 – roughly three times the escalation seen among wealthy households.
Similarly, over the same period, real household expenditures on motor vehicles, insurance and public transit (excluding motor fuels) rose by +35% among the lowest 20% of households by income, more than twice the rate of wealthier households. Please note that the number of vehicles per household fell to an average of 1.9 in 2019 from 2.0 in 2009 but remained steady at 1.0 for the lowest 20% of households by income. Consequently, the increased expenditures represented higher prices paid for new and used vehicles, likely enabled by historically low interest rates and more households leasing rather than buying their vehicles, focusing on the monthly payment that suits their budget.
To recap, we’ve quantified the extent to which households have spent more on virtually everything other than energy and that – especially for housing and vehicles, maintenance and insurance – the lowest 60% of U.S. households by income have experienced the largest increases. We have one final point:
Consumer spending translates into energy demand
Every dollar a household spends relates to energy and broader economic activity, which in turn also requires energy. As households spend more in total, the relationship to energy consumption across the entire value chain has remained inextricable.
For example, if nationwide total household spending increased by 10%, API’s statistical analysis (relative to U.S. Energy Information Administration data on state energy consumption) suggests this corresponds with roughly proportionate changes in residential and transportation-related energy consumption but also notable increases in industrial and commercial energy consumption.
This effort measures the extent to which household expenditures are interrelated with Americans’ beliefs and choices about how they live, work and travel; what they need to maintain an increased standard of living; and, what’s essential for the health and prosperity of their families. Said differently, everything requires energy (including staying at home during a pandemic), virtually dollar-for-dollar.
We’ve established a couple of things about potential energy policies. First, there are those like restrictions to federal leasing for oil, policy shifts affecting hydraulic fracturing, and regulatory obstacles to energy transportation, including but not limited to pipelines, that could drive up energy costs and impact household budgets for everyone nationwide.
Additionally, there are other proposals that champion specific technologies over others and could make vehicles and building construction more expensive. If history is a predictor, raising these costs could disproportionately harm lower-income households.
To these points, some might propose that government could install support mechanisms for low-income households. This generally has not been the case in the promotion of electric vehicles, solar panels or other technologies. These have primarily benefitted higher-income households that typically own a home, multiple vehicles and have the cash on hand to purchase big-ticket items for which tax credits or rebates come later. In any event, proposing to remedy distortions due to one government intervention with another one would be downright inefficient.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.