Here’s How Much Gas Prices Would Have To Rise To Wipeout The Trump Tax Cuts For Average Americans

Here’s How Much Gas Prices Would Have To Rise To Wipeout The Trump Tax Cuts For Average Americans

Late Friday, Bloomberg reported that Mike Pompeo and Steve Mnuchin have summarily rejected requests from America’s European allies seeking waivers from secondary sanctions imposed on countries who import Iranian crude.

According to a letter described to Bloomberg by sources close to finance and foreign ministers of the U.K., France and Germany, Pompeo indicated the Trump administration intends to apply “unprecedented financial pressure” on Tehran, pressure that will not abate until the Trump administration sees what it’s describing as a “tangible, demonstrable and sustained shift’’ in Iran’s behavior.

Long story short, that “tangible, demonstrable and sustained shift’’ is not forthcoming to the extent it entails Tehran reining in the regional activities of Qassem Soleimani and the Quds force.

Contrary to the prevailing narrative, that is the goal here. This has less to do with nuclear proliferation and more to do with the U.S. attempting to assist Israel and Saudi Arabia in their efforts to halt Iran’s momentum in cementing the Shia crescent and expanding their influence. Pompeo said as much this week in an exclusive interview with The National.

The details of the communication between Pompeo and Mnuchin, on the U.S. side, and the European powers on the other, came just hours after reports that Trump is actively considering tapping the Strategic Petroleum Reserve in order to drive down prices at the pump ahead of the November midterms.

The hardline stance on Iran is working at cross purposes with the administration’s attempts to drive oil prices lower. Although crude has fallen recently on jitters about the extent to which trade tensions could entail demand destruction in the commodities complex, all signs point to a market dynamic wherein increased Saudi production will be unable to offset the effect of lost Iranian barrels.

Even if the Saudis and Russia can mechanically make up for the shortfall, the accompanying constraints on spare capacity will limit their ability to respond to future supply shocks emanating from, for instance, Venezuela, which is rapidly descending into failed state status.

“Recent news of possible financing from China does not change our view on the additional downside risk for Venezuela’s oil production”, Barclays wrote, in a note dated July 12, before adding that “the number of operating rigs continues to fall, reaching 26 in June, the lowest level since the 2002 oil strike and implying very low capex levels that stay short of the amount needed to take Venezuela production out of its downward spiral.”


In other words, the harder the line the Trump administration takes on Iran, the more upward pressure on prices there’s likely to be and the SPR news indicates that Trump is well aware of the potential for prices at the pump to rise headed into the midterms.

This all comes back to the President’s concern that higher prices at the pump will eat into the benefits that are expected to accrue to consumers from the tax cuts. If rising gas prices negate those savings, well then that could potentially remove one more feather from the GOP’s cap in November.

The natural question, then, is this (as posed by BofAML in a note dated July 11):

At what point would higher gas prices fully offset the tax cuts?

Here’s the answer, from the bank’s analysis:

Vehicles on the road in the US consumed, on average, 55 gallons of fuel per month in 2016 according to the Federal Highway Administration. To put this into context, for a compact car or a medium size sedan, this works out to be a full tank of gas per week. Demand for gasoline is relatively inelastic so we can safely assume no demand response from an oil price shock in the short run. Therefore, the run up in gasoline price since the start of the year would cost the average consumer around $30 per month.


We think most consumers have been able to offset the latest increase in gasoline prices. According to the Tax Policy Center, with the exception of the bottom quintile, taxpayers are receiving at least a $30 tax cut per month due to the Tax Cuts and Jobs Act.

However, further boost in gasoline prices could ultimately offset most of the tax cut benefits. For example, another $1 per gallon at the gas pump would cost another $60 dollars per month. All told, the extra $90 per month spending at the gasoline station would be enough to offset tax cuts for majority of consumers.

It’s not, of course, quite that simple. That may be the mechanical way to look at things but the bank also references academic work which seeks to tease out what constitutes a “price shock”.

The implication in the “shock” characterization is that irrespective of the actual math, when consumers go to the pump and notice that prices are markedly higher than they remember them being the last time they actually took the time to see how much they were paying, it might cause a psychological effect that ends up curtailing discretionary spending.

That, in turn, could weigh on economies where consumer spending accounts for a relatively large share of GDP.

Whether Trump actually understands the math on this is irrelevant. He undoubtedly understands the concept, which is why you can probably look forward to more of this in in the lead up to the midterm elections…

6 thoughts on “Here’s How Much Gas Prices Would Have To Rise To Wipeout The Trump Tax Cuts For Average Americans

  1. So, simply by refusing to pump more (or in the extreme, choosing to pump less) Russia could soon make itself the world’s swing producer and exert some pretty impressive leverage over the US and its ‘allies’?

    It’s Derrick – rather than Derek – and the Dominos, then. As an aside, ‘Layla’ was inspired by an ancient Persian love story, adapted by Clapton to reference Patti Boyd. Nice touch of irony woven in there. (Apologies to millennials clueless as to what grandpa’s jabbering about. It’s the weekend….you should be trading Bitcoin, not reading blogs.)

  2. Interesting how your post shows just how small the tax cut really was for individuals. It will barely fund a typical family’s cell phone tab for 2 or 3 months. Companies, on the other hand, are going to be able to waste $800bil buying back their stock at sky high multiples so the C-suiters can buy more $15mil houses with the huge raises they will get as their stock artificially rises. That’s America being greater.

  3. Uh, and the transportation industry… ships, planes, and trucks deliver through channels of distribution just about everything there is anyone could conceivably buy.
    They’ll also incur higher fuel costs. But not to worry… the transportation industry will just eat the extra cost of fuel because MAGA.

  4. @Error404. Layla and Majnun is the inspiration grandpa, and it is arab not persian. Beside’s Clapton, it inspired Romeo and Juliet as well.

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