Depending on global supply and demand, as well as geopolitical tensions, the price of gasoline can rise and fall. Price spikes in oil markets are mainly caused by the overall difficulty to find and extract fairly priced oil. Oil price increases are generally associated with an increase in inflation and a decrease in economic growth. However, the plunge in oil prices influences not only macroeconomics but also microeconomics, in particular, household shopping bills. The purpose of the given research paper is to investigate how oil prices may change household budgets.
The oil market has seen huge price swings in just the past several months with prices ripping higher and then plunging (U.S. Energy Information Administration, 2019). However, such volatility can be considered the new normal for the oil market because of the US becoming the world’s largest oil producer outpacing Saudi Arabia and Russia (U.S. Department of Energy, 2018).
Considering the Saudi-Russia alliance, the new dominance of the US will lead to new tensions and the industry being in need of adjustment (U.S. Department of Energy, 2018). Volatility in the oil market can also be explained by the US-China trade war and the US sanctions on Iran’s and Venezuela’s oil sections.
In the history of the US, one may recollect two oil shocks, the one prompted by Yom Kippur War in 1973 and another one triggered by the Iranian Revolution in 1979 (Kilian & Vigfusson, 2014). Both of those oil shocks led to high levels of unemployment and inflation. However, the successive oil shocks that took place in the early 2000s were not characterized by such economic fluctuations (Kilian & Vigfusson, 2014). One could assume that a decline in the impact of oil shocks on the economy can be explained by the flexibility of labor markets and improvements in fiscal and monetary policy.
A household budget consists of two elements, one of which is income for the household, and another one is the total amount of expenses. Based on suppositions regarding changes in the income and expenses associated with oil prices, one can predict the household budget. Considering that oil prices do not impact wages (at least in the short run), it is possible to assume that the amount of fixed (utilities, housing payment) and variable (food and clothes) expenses will rise.
Though the US can increasingly rely on oil pumped at home, consequences of tremendous oil prices volatility are going to influence household budgets mostly in an ambiguous manner. The rise in the price of crude oil will act as a regressive tax on middle-income and low-income people who will have to adjust their shopping lists accordingly (Saari, Dietzenbacher, & Los, 2016). The most obvious implication is an increase in housing payment, utilities, and transportation expenses.
In terms of increased inflation stimulated by an increase in oil prices, the prices of goods made and transported with the use of petroleum products will rise correspondingly. In other words, high oil prices will shift up the supply curve for those products for which oil is an input.
Though not directly, oil prices can also affect manufacturing, which will lead to an increased cost of different household appliances and services. This will happen if producers decide to transfer the financial responsibility of manufacturing to the customers. In terms of supply and demand, in case of high oil prices, the supply of products and services which are extremely dependent on oil will decrease (Krupnick et al., 2017). In turn, the demand for costly services and products will decrease as their affordability will decrease for middle-income and low-income people.
It should be mentioned that while crude oil is an indispensable part of every household as a commodity, any price swings in oil price will have a direct impact on the household budget. Apart from commodities, the cost of the loan, insurance, and home ownership will also increase. That is why one may note that the largest impact of oil prices fluctuations is on low-income households as they have little discretion in their budgets.
Accordingly, the impact of the fall in the price of oil products on microeconomics is mostly positive. This is because such a decline is usually associated with transport and business costs reduction. If transport is expensive, people tend to use it less frequently, which is especially the case for those living in the suburbs. As a result, people do not go to cities (for example, on weekends) and spend less both on transport and clothes or entertainment. It is a fact that lower oil prices reduce the household budget because of the reduced cost of living (Pettinger, 2017). That is why consumers have more discretionary income, which means that they have much money to spend. In other words, the effect of the fall in the price of oil products on the household budget is fairly similar to the effect of a free tax cut.
In summary, depending on the price of oil products, oil market can affect the household budget in both a positive or negative way. If the price of oil products is high, fixed and variables expenses of a household will increase due to increased costs of transportation services, utilities, goods, and other services. If the price of oil products decreases, people will have more money to spend due to a decrease in the above-mentioned costs.
References
Kilian, L., & Vigfusson, R. J. (2014). The role of oil price shocks in causing U.S. recessions. Web.
Krupnick, A., Morgenstern, R., Balke, N., Brown, S. P. A., Herrera, A. M., & Mohan, S. (2017). Oil supply shocks, US gross domestic product, and the oil security premium. Web.
Pettinger, T. (2017). Impact of falling oil prices. Web.
Saari, M. Y., Dietzenbacher, E., & Los, B. (2016). The impacts of petroleum price fluctuations on income distribution across ethnic groups in Malaysia. Ecological Economics, 130(10), 25-36. Web.
U.S. Department of Energy. (2018). U.S. becomes world’s largest crude oil producer and Department of Energy authorizes short term natural gas exports. Web.
U.S. Energy Information Administration. (2019). Spot prices for crude oil and petroleum products. Web.