Energy and economic analysts at multiple banks have noted that a rise in oil and gas prices by $1 could wipe away any benefits bestowed by the tax cuts passed last year.
According to Deutsche Bank, a rise much smaller than that would wipe out the increased discretionary income generated by the tax cuts for the lower economic tiers.
RBC issued a note with similar analysis, but put that dollar threshold into perspective, noting it was a “high hurdle” to clear, considering that gas prices would need to be $3.40 on average. According to GasBuddy, the national average is now $2.832 a gallon.
Still, sustained prices at current levels would effectively remove a third of the tax cuts’ benefit of raising take-home pay, according to Morgan Stanley. As the bank’s analysts wrote, “Gasoline expenditures are highly inelastic — when prices rise, we must divert expenditures from elsewhere.”
Unfortunately, staying at current prices seems unlikely, considering there is reason to believe more upward pressure is to come on gas prices, especially since President Trump is reportedly announcing that he will be leaving the Iran deal and increasing sanctions.
Geopolitical risk is rising
Up until now, geopolitical risk hasn’t been behind the rise in gas prices, just tightening fundamentals led by strong demand and disciplined OPEC producers.
On Tuesday morning, Trump had reportedly told French President Emmanuel Macron that he would pull out of the Iran deal and heap new sanctions on Iran. According to Goldman Sachs, this will result in “modest” negative price increases initially, adding geopolitical risk into petroleum pricing.
“Continuing the deal would be a surprise and could bring lower gas prices, while prices may move higher if the deal is killed,” Patrick DeHann, head of petroleum analysis at GasBuddy, told Yahoo Finance. “Language will be key – will tensions with Iran be escalated? The strength of the announcement in terms of tonality is what I believe will dictate how oil and gas prices react.”
In terms of numbers, DeHann estimates cooling tensions could lower prices by 10 cents a gallon and escalating ones could push prices up by 25 cents a gallon overall.
Analysts at Goldman Sachs noted that increasing geopolitical risk in Saudi Arabia, Venezuela, Libya and Nigeria mean more inventory risks and expect increased price volatility.
In addition to affecting Iran’s oil, a soured Iran deal could cause further global instability. According to Nomura Securities, Trump’s Iran policies carry tail risk of more tensions escalating in the Middle East.