NOTE

Energy Poverty American Style

by Trevor Houser and Shashank Mohan | September 26, 2011

The term “energy poverty” is used to describe the 1.6 billion people in the developing world who lack access to electricity or the more than 2 billion who still rely on biomass as their primary source of energy. This phenomenon presents a significant barrier to economic growth in poor countries. But data released last week from the Census Bureau points to a new kind of energy poverty taking place here in the United States as the result of high oil prices and a weak economic recovery.

In their annual report on Income, Poverty, and Health Insurance Coverage in the United States, the Census Bureau found that the number of Americans living in poverty grew by 2.6 million to 46.2 million in 2010—the highest level recorded since the survey began more than 50 years ago (figure 1). Overall US population growth accounts for some of the increase in the number of poor Americans, but the poverty rate also spiked in 2010—from 14.3 percent to 15.1 percent of the total population—putting the United States within striking distance of poverty rates we haven’t experienced since the early 1960s.

Stagnant wage growth is to blame for much of the growth in America’s poverty rate. Indeed, the Census Bureau found that nominal income declined in 2010 by 0.7 percent. That was not quite as bad as the 1.1 percent annual decline we saw in 2009, but rising consumer prices last year made the drop in real income even worse. Unlike 2009, when consumer prices fell by 0.4 percent, softening the blow of smaller paychecks, the cost of living rose by 1.6 percent in 2010. As a result, real income fell by 2.3 percent last year, a three-fold increase over the rate of decline in 2009.

The Census Bureau report notes that this is not the first time real income has declined after the end of a recession. Indeed, six of the last seven US recessions have been followed by a year of flat or negative real income growth. But 2010 was worse than any post-recession year since the Census Bureau started keeping records, and that has a lot to do with changes in the global oil market.

Table 1 shows the year-on-year change in US GDP, real median household income, and oil prices for the first full calendar year following the past seven US recessions. For most of the post-war period, America accounted for such a large share of global oil demand that global oil prices fell when the US economy went into recession, and didn’t rise again until the US economy recovered. The exception was in 1980, when supply disruptions in the Middle East caused oil prices to outpace the US economic recovery and contributed to the double-dip recession in 1981.

With America’s share of global oil demand down from 33 percent in 1970 to 22 percent today, the US business cycle has less of an impact on global oil prices. And that is a problem for American households struggling to emerge from recession. While global oil prices collapsed in 2009 thanks to the financial crisis, they rebounded strongly in 2010, despite a weak US recovery, thanks to robust demand growth in emerging markets. That reduced real income for all households and played a major role in the jump in America’s poverty rate.

Digging through the Census Bureau’s 2011 Current Population Survey Annual Social and Economic Supplement, the data source for last week’s poverty report, we estimate that over one-third of the increase in the US poverty rate in 2010 resulted from the rapid rebound in oil prices, using the Census Bureau’s methodology. The increased cost of gasoline at the pump was enough to push just under 1 million Americans into poverty, defined as $11,139 dollars per year in income1 for an individual or $22,113 for a family of four. If oil prices had remained constant at 2001 levels over the past decade, there would be 2.6 million fewer Americans in poverty today and an overall poverty rate of 14.3 percent (figures 2 and 3).

And these are conservative estimates. The Census Bureau adjusts its poverty threshold each year using the average price index for all consumers. Yet the poorer you are, the larger the slice of your income required to buy oil (figure 4). The poorest fifth of Americans spend 10.3 percent of their income on oil compared to 2.4 percent for the top fifth. As a result, recent oil price increases should have a larger impact on poverty rates than our numbers above suggest.

In addition, we are only estimating the direct impacts of higher oil prices—i.e., the change in what US households spend at the pump. But oil is also an input into a wide range of goods and services consumed by Americans—goods and services that have become more expensive as oil costs have increased.

Unfortunately, 2011 is unlikely to offer much relief. The cost of crude oil to US refineries rose 35 percent year-on-year January through July, up from the 30 percent year-on-year increase in 2010. This has helped accelerate overall consumer price inflation, which reached 3.8 percent year-on-year in August, compared to 1.6 percent during 2010. In the absence of an upside surprise in income growth or a sudden collapse in oil prices in the months ahead, expect another round of depressing poverty numbers this time next year.