The rising impact of high oil prices

Americans now spend a larger share of their income on energy than at any time since 1986.

from the April 18, 2008 edition

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Energy prices, particularly at the pump, are now part of the presidential campaign. On Tuesday, Sen. John McCain (R) of Arizona, as part of a broad economic plan, proposed removing the federal tax on fuels, 18.4 cents a gallon for gasoline and 24.4 cents on diesel from Memorial Day to Labor Day.

"The effect will be an immediate economic stimulus – taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up," said Senator McCain said in his speech at Carnegie Mellon University in Pittsburgh.

Opponents of the proposal quickly pointed out that the tax goes to fund highway and transit programs. Without the tax, the government would lose $9 billion in revenue. "We have looked at it in terms of jobs and estimate 312,000 jobs would be in jeopardy, so it's a little puzzling for us why you would do something to depress a major sector of the economy – construction," says Matt Jeanneret, a spokesman for the American Road & Transportation Builders Association in Washington.

The construction industry is also feeling the pinch of rising energy prices, says Ken Simonson, chief economist for the Associated General Contractors of America in Arlington, Va. "It's brutal," he says. "Contractors use a great deal of fuel ... for digging equipment and moving earth and now they are paying whopping fuel surcharges."

On Tuesday, a government report showed how energy prices are eating into the corporate bottom line. The March producer price index (PPI), a measure of changes in wholesale prices, rose 1.1 percent over the prior month. So far this year, the PPI is up 6.9 percent.

"This is really going very badly for retailers," says Scott Krugman of the National Retail Federation in Washington. "Basically, the high gasoline prices are like an extra tax on the industry."

Mr. Krugman says the federation's past studies have found consumers react to rising gasoline prices by making small sacrifices. "We have found the first way they cut back is by eating out less," he says.

That would be the case for Nancy Owens in Rochester, N.Y. This winter she cut off her cable TV to pay for heat.

Ms. Owens, a former hospital worker now on disability, only goes to restaurants for special occasions. "It really cuts off your social life," she says, "but right now, I only use the car for groceries and doctors' appointments."

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