Oil-Price Shock Is Hitting American Consumers Hardest

US crude is now up $20 in two months. The extra wealth oil producers are now draining from America is greater than the annual cost of most US government agencies.


The falling dollar is ensuring that consumers in the US are hardest hit.

Two months ago popular uprisings across North Africa had already rocked Algeria, forced regime change in Tunisia and Hosni Mubarak’s resignation in Egypt.

But the price of oil really took off Feb. 16, when riot police clashed with protestors in Libya’s second-largest city of Benghazi. The fear was that unrest would spread to Saudi Aria and destabilize its vast exports of crude.

Goldman Sach’scall this week to book profits has brought US crude off its highs. However, over two months it’s still up 25%. Let's call it an extra $20 a barrel. Americans alone are locked into feeling the full force of that.

Among developed nations commodity inflation is more brutal in the United States because we’re sitting on a dollar that continues to weaken. By comparison, over those two months the euro and Swiss franc are up 7%. The Australian Dollar has gained 5%.

People importing oil into those countries find their currencies go further, so they are partly cushioned from the higher (dollar) price of oil.

What does an extra $20 a barrel mean for most Americans? The obvious immediate effect is the rising cost of gas.

Last week retail gasoline prices rose 11 cents to a national average of $3.79 a gallon. It could go higher still since insiders tell me there’s typically a lag of two weeks between pricing on international oil markets and pricing at local gas pumps.

Already more than six out of every 10 Americans are driving less or making economies elsewhere, according to Wedneday’s Reuters/Ipsos poll. Also, investors increasingly focus on the risk economic growth will slow in the second half of the year.

How much wealth is $20 a barrel sucking out of the America?

The Energy Information Administration‘s latest estimate is that the US will import 9.5 million barrels of oil each day in 2011. If that holds despite the higher price of crude, that’s 3.46 billion barrels a year.

So an extra $20 a barrel means America will pay an additional $190 million each day for its oil imports, or $69.3 billion each year.

Compare that with, say, federal spending.

After Friday's last-ditch budget deal on discretionary spending, here’s what the Washington Post predicts the big, non-defense Federal agencies will now spend this year:

  • Transportation, $87 billion
  • Education, Labor, Health, $69 billion
  • Veterans Benefits, $67 billion
  • International Affairs, $56 billion
  • Justice, $51 billion
  • Environment, $35 billion

Only transportation will cost Americans more than the extra $69.3 billion being spent on oil.

Remember: That’s a direct transfer of wealth straight out the United States to oil-producing nations. No multiplier effect, no extra American jobs and no extra American growth.

Now that’s an oil price shock.