AhlulBayt News Agency (ABNA): Oil's impact in America is not limited to the price board at fuel stations. A barrel that is being traded at nearly $117 in the market these days shows up in grocery bills, home heating costs, and the price of packaging goods in this country, and in some cases, it even reaches mortgage payments in America.
Brent crude closed at $116.72 per barrel on Friday. An increase of 3.1 percent in one day, which was its highest closing price since April 29. Reuters news agency reported that attacks by Yemen's armed forces on Saudi Arabia's facilities increased concerns about a new disruption in oil supply. Crude oil prices also grew by about 6 percent during the week.
Reuters news agency, in a new report, has followed the path of transmission of this shock from fuel to transportation, from transportation to food and goods, then to inflation, and finally to interest rates, step by step.
First Link: The Fuel Station
In the United States, the average price of regular gasoline in the week ending October 19 reached $4.28 per gallon. A figure that shows an increase of $1.27, or about 42 percent, compared to a year ago. This statistic was published by the US Energy Information Administration.
But the bigger jump relates to diesel. The price of this fuel reached $6.28 per gallon, while a year ago it was $3.62, and based on the data of this same administration, it has increased by nearly 73 percent.
This crisis forced "Donald Trump," the President of the United States, to allow all consumers in this country to purchase red diesel until the end of the current year. According to Reuters, this fuel is usually used for agricultural machinery and equipment that do not travel on public roads and is sold without paying road tax.
The importance of diesel is not limited to car owners. Trucks transporting food and goods, agricultural tractors, and construction machinery all depend on this fuel. Every time the price of diesel increases, its cost is gradually added to the price of goods; before these goods reach the consumer.
Second Link: The Store Shelf
Oil enters the price of goods through two paths. First through transportation costs and second through materials that are directly produced from oil.
Most types of plastic are made from oil or natural gas. Based on the estimate of the consulting company "MAT" cited by Reuters, packaging constitutes between 5 and 15 percent of the production cost of a food product.
This chain also extends to farms. Chemical fertilizers are produced from natural gas, and their price increase, along with disruption in maritime transportation, has led the Food and Agriculture Organization of the United Nations (FAO) to predict that global food inflation will accelerate and this trend will continue until 2027.
In this way, the increase in oil prices not only raises the cost of delivering products to the store but can also increase the cost of producing, packaging, and supplying them.
Third Link: Inside the Home
As winter approaches, the energy shock is transmitted to home heating costs.
The US Energy Information Administration predicts that the price of heating oil this winter in this country will increase by 34 percent and reach $5.26 per gallon. It is also expected that the cost for households that use this fuel will increase by 21 percent and reach an average of about $2,115 during the season.
Heating oil consumption is mainly concentrated in the northeastern states of America. Areas where estimates extracted from US Energy Information Administration data show that about 15 percent of their households use this fuel as their main source of heating.
According to the National Energy Assistance Directors Association, the heating bill in the American state of "New York" may increase by about 47 percent compared to last year.
In contrast, the US Energy Information Administration predicts that the cost for households that use natural gas will decrease by 9 percent. This difference shows that the extent of financial pressure caused by energy depends to a large extent on the type of fuel used to heat the home.
Fourth Link: Inflation
When the price of fuel, transportation, and food increases simultaneously, its effect becomes visible in price indices as well.
According to a Reuters report, the annual inflation rate in America reached 3.7 percent in September, and the increase in gasoline prices constituted more than half of the growth in consumer prices that month.
This situation confronts the US Federal Reserve with a difficult equation. This institution in September raised the country's bank interest rate to the range of 3.75 to 4 percent.
"Mary Daly," the president of the Federal Reserve Bank of San Francisco, said in mid-October that a further increase in interest rates might be necessary, although at that time she did not see a need for action at that month's meeting. She also noted that gasoline is the main factor in the increase in general inflation.
In such circumstances, monetary policymakers face the issue that an increase in energy costs can keep inflation high and, as a result, raise the necessity of maintaining high interest rates or even increasing them again.
Final Link: Mortgage
At this stage, the effect of oil reaches a point that at first glance may not seem to have any direct connection to it, and that point is the mortgage payment.
According to data from Freddie Mac, the average interest rate of a 30-year fixed-rate mortgage in America reached 7.32 percent on October 22, while this rate was 6.27 percent about a year ago.
Simple calculations show that this difference in interest rate increases the monthly payment of a $300,000 loan—before calculating taxes and insurance—from about $1,851 to nearly $2,061.
In other words, the borrower must pay about $210 more per month, a figure that exceeds $2,500 over a year.
The increase in financing costs has also affected the American housing market. The confidence index of home construction companies published by the National Association of Home Builders and Wells Fargo decreased in October from 32 units in September to 29 units, which is the lowest level since 2012.
Costs Are Not Distributed Equally Among Households
Not all American households pay the same cost. Low-income families in this country spend a larger share of their income on fuel, food, and heating. For this reason, they feel the shock of price increases faster and more severely.
The extent of this pressure also differs geographically in America. Residents of states that are more dependent on cars feel the increase in costs at fuel stations. Residents of the northeastern regions of America face an increase in heating costs, and new home buyers also bear the pressure caused by higher interest rates.
This issue has also taken on a political dimension before the American midterm elections on November 3. Reuters reported that the increase in heating oil prices has become an obstacle for Republican candidates in Senate races in the northeastern states of America, especially as winter approaches.
This chain shows that the price of oil is not merely a number on stock market screens. A barrel of oil begins its journey from the tanker and refinery, then passes through the truck, factory, and store, and may ultimately reach the bank that determines the amount of the mortgage payment.
Therefore, the longer the energy crisis continues, the main question is no longer just what price each barrel of oil has reached. Rather, one must ask how many parts of the American household budget this price increase has penetrated so far.
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