After oil prices eclipsed $70 a barrel last week for the first time since the summer of 2014 – when oil prices suddenly plunged as the dollar strengthened and shale producers tried to pump their way to market dominance – we knew it was just a matter of time before gas prices reached another troubling milestone (for consumers at least).

And now they have. Because, as the Fresno Bee reports, gasoline prices in Fresno, Calif. have blown past $4/gallon this week as prices in California reached their highest level since 2014.


Meanwhile, the national average has climbed to $2.81 from $2.34. Gas in Fresno typically costs $1 above the national average, thanks largely to the Golden State’s high taxes and demanding standards for reformulating gasoline. 

What’s worse, it’s likely they’ll rise further as $70 a barrel feeds through to gasoline at the pump – a process that typically takes a few weeks. Though In California, which has the fifth highest gas tax in the country, prices are typically much higher. In addition to the taxes, the state has the strictest emissions laws in the country, which requires consumers to use a particular type of gasoline that only a few refineries produce.


While higher gas prices will benefit oil companies and their shareholders, virtually everybody else will face cutbacks to their discretionary spending that could more than erase the benefits from the Trump tax cuts, as we pointed out last month. And with the personal savings rate already near all-time lows, this could curb consumption, to the detriment of the broader economy.

But don’t take our word for it.

According to the Urban-Brookings Tax Policy Center, Americans will spend an average $400 per household more on fuel this year than in 2016. By contrast, middle-income US households will on average gain $930 from the tax cut bill.

But since the distribution of the middle class is non-homogenous, lower income households will see a disproportionately severe impact from rising gas prices, as the table form Deutsche Bank shows. They’ll also see less of a benefit from the tax cuts.


Another way of visualizing how the composition of spending by US consumers will be impacted is shown in the chart below, which lays out the share of spending on gas as a portion of the total household budget.

Chart Two

And with 200-500kb/d of Iranian crude about to exit the market (by UBS’s estimation), many expect oil prices to continue rising.

Hence, the scramble by banks’ commodity strategists to raise their oil calls high enough to nod at the trend – but not so high that it spooks their clients.

Bank of America became the first Wall Street bank to call $100/bbl for Brent crude (which was trading at $77/bbl on Thursday) in 2019, Bloomberg reported. At that level, prices at the pump would surpass $5 a barrel in California and other high-tax states.

Goldman, meanwhile, sees Brent rising to $82.50 a barrel in the coming months, and says there’s a chance prices could surpass that level – though it sees prices retracing those gains in 2019. But curiously, in Goldman’s estimation, the biggest upside risk isn’t coming from Iran, but other choke points: Growing geopolitical tension in other key oil producing countries like Saudi Arabia, Venezuela, Libya and Nigeria create risks of additional production losses in the face of depleted inventory.


But while it’s unclear how high prices will ultimately rise, the fact remains: Oil’s year-to-date runup has already erased roughly half of the benefit from the tax cuts.

Pretty soon, we might see a return of joke signs like the one below:


And what’s worse, with oil prices and interest rates rising, consumers are finding themselves in a double-bind as economic forces chip away at their already diminished spending power.

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