Signing Your Economic Stimulus Over to the Saudis?

Higher energy prices could gobble up any bonus that Americans get.

By + More

President Bush's economic stimulus plan would put $800 in the pocket of almost every taxpayer. Given that Congress is pretty much on the same page, why isn't that prospect buoying everyone's hopes? Maybe one reason is that Wall Street and consumers alike realize that unless oil prices drop significantly—which may well happen if we fall into a recession—many will be emptying that newfound stash just to pay for the increase in gasoline and other energy prices this year.

Let's use the most recent predictions of the U.S. Energy Information Administration, which was presuming (at least, as of January 8) that the economy would continue to grow and that the price of oil would fall somewhat—to an average of $87 a barrel this year. EIA has been conservative, estimating a year ago that the 2007 oil price would be $64.42 per barrel when it turned out to be $72. EIA now predicts that the average price for gasoline in 2008 will be $3.14 a gallon, up about 12 percent over last year. That would mean that the average U.S. household with two cars, which consumes 1,143 gallons of gasoline, will be paying about $377 more for gasoline. That's nearly half of the money that Uncle Sam would be handing over to one taxpayer in the hopes of spurring consumer spending.

But the bite could be far bigger for some. Households that use heating oil—a small percentage nationwide but a significant number in the Middle Atlantic and New England states—are paying on average $560 more this year than last year to get through the winter. Even a recession (and lower oil prices) won't help; that money is already out the door. For an average two-car household that uses heating oil, then, one entire proposed economic stimulus payment is on track to be spent just paying this year's premium on oil and gasoline. And let's hope there's another taxpayer in the house, because higher fuel costs would eat up 17 percent of the second wage earner's economic stimulus check, too.

If you're in the 58 percent of households that heat with natural gas, you may feel you've dodged a bullet, because you are paying only $70 more for heat over last year. But what if your two cars happen to be—and this is not an unusual combination in the suburbs—a Chevy Suburban that gets about 15 miles per gallon and a BMW sedan that gets 19 mpg? If you drive an average amount, divided evenly between the two vehicles, it's expected that you'll spend $453 more for gasoline in 2008. In that household, about 65 percent of one taxpayer's economic stimulus cash would be going to pay for the increase in energy prices.

Of course, the wild card, as mentioned, is whether an economic slowdown could trigger a major energy price drop. That's what has happened in the past, but the oil market's gyrations suggest that it isn't a given. Oil initially fell more than $3 per barrel to just over $87 on recession worries, but when the Federal Reserve cut interest rates today, the price began to climb again. That's because investors seek out commodities like oil as a hedge against inflation, which they fear the Fed could trigger as it tries to head off recession.

But put aside the future, with all its unpredictability. Up to now, a good number of economists had come to believe that the economy could simply shrug off high energy prices. But the reality is that the average U.S. household, which paid about $1,500 for gasoline in 2001, had to fork over more than $3,200 in 2007 for the very same product—a bonanza for the oil-producing states and big oil companies but for few others. If the tables now turn and the economy begins to suffer, how many economists won't blame, in part, the drain of paying more each year for oil?