Impact of Rising Energy Costs on Older Americans

Impact of Rising Energy Costs
on Older Americans
Janemarie Mulvey
Specialist on Aging Policy
Domestic Social Policy Division
Summary
Energy-related expenditures include spending for utilities and fuel to operate, heat,
and cool homes and spending for gasoline and motor oil for private transportation.
Energy prices to consumers have increased 70% between 2000 and 2007, driven largely
by growth in prices for energy commodities such as petroleum. Petroleum-based
products such as fuel oil, propane and gasoline comprise about 50% of household energy
expenditures.
Older Americans are disproportionately affected by higher energy costs. As a share
of income, households headed by a person age 65 or older spend more on energy-related
expenditures than their younger counterparts. In addition, low-income households (those
with less than $15,000 in household income) spent nearly 20% of their household
income on energy-related expenditures in 2006 (the latest year for which data are
available). This compares to 7.3% spent by older households with incomes above
$15,000. These estimates are for 2006 and do not reflect the additional 17% increase
in energy prices that occurred in 2007.
The key public program that provides energy assistance to low-income households
is the Low-Income Home Energy Assistance Program (LIHEAP). Approximately 40%
of low-income households that were eligible for LIHEAP have a household member
aged 60 or older. Funding for the LIHEAP Program has not kept pace with recent
increases in energy costs of older Americans. This report will explore the burden of
rising energy costs on older Americans and discuss implications for public policies.
This report will be updated when new data is released.

Background
In 2006, expenditures on energy-related goods and services represented nearly 10%
of total expenditures for older households.¹ There are two main components of energy
expenditures. Over half (57%) are for utilities and fuel to operate, heat, and cool homes;
the remaining 43% are for gasoline and motor oil.²
Within the category of utilities and fuel, electricity comprises the largest share of
spending, representing nearly two-thirds (62.8%) of this category. Second is natural gas
(27.6%), and the remaining 9.6% are petroleum-based fuels like fuel oil and propane.
However, the reliance on certain fuels varies widely by geographic region. Natural gas is
the most commonly used source in the Northeast (55%), Midwest (79%) and West (66%),
while electricity is the most commonly used source in the South (52%). In the Northeast,
heating oil is also a significant fuel source, where it is reported second to natural gas as
a primary fuel source (see Table 1).
Table 1. Percent of Households Using Indicated Fuel
As Primary Source, By Region
Nort heast M i dw e st Sout h West U.S.
Natural Gas5579416658
Heating Oil323217
Propane27545
Electricity 11 11 52 30 30
^Source:^S^h^ort^-^T^e^rm^En^erg^y^O^u^t^l^ook^{, O}^c^t^{ober 2007, En}^erg^y^In^f^o^rm^atⁱ^oⁿ^A^d^mⁱⁿⁱ^s^t^ratⁱ^oⁿ^.
Petroleum-based products like fuel oil, propane, and gasoline comprise about 50%
of household energy expenditures.³ Increases in costs in this category reflect the
significant increases in the price of crude oil over the past five years. Over the past five
years, the price per barrel of crude oil has risen nearly 200%.⁴ Over the same period,
prices charged to consumers for petroleum-based energy costs (energy commodities)
increased 117%, while prices charged for energy services increased 38% (see Table 2).
Effect of Rising Energy Costs on Consumer Prices
Growth in overall energy spending is driven by two key factors: the price charged
to the consumer and the quantity demanded. Energy prices to consumers have increased
70% between 2000 and 2007 as compared to a 20% rise in overall prices over the same
time period. More recently, in 2007, overall energy prices rose 17.4% as compared to a

¹ Older households are defined as a household headed by a person age 65 or older.
² CRS estimates from BLS Consumer Expenditure Survey, 2006.
³ ibid.
⁴ Energy Information Administration, US Spot Price FOB Weighted by Estimated Import
Volume, January 2003 to November 2007.

4.1% rise in overall prices (see Table 2). In fact, the increase in energy prices in
December of 2007 accounted for about one-third of the overall CPI increase in that
month.
Table 2. Trends in Consumer Price Index (CPI-U), 2000 to 2007
(percent)
20002001200220032004200520062007
All Items3.41.62.41.93.33.42.54.1
T r ansportation 4.1 -3.8 3.8 0.3 6.5 4.8 1.6 8.3
Energy 14.2 -13.0 10.7 6.9 16.6 17.1 2.9 17.4
Energy Commodities^a15.7-24.523.76.926.716.76.129.4
Energy Services^b12.7-1.50.46.96.817.6-0.63.4
All Items Less Energy2.62.81.81.52.22.22.52.8
^Source:^Bu^reau^of^L^a^{bor S}^t^atⁱ^s^tⁱ^c^s^,^Jan^u^a^ry^{16, 2008, pres}^s^rel^eas^e.
^{a. En}^erg^y^com^m^odity^prices^ref^l^{ect petroleu}^m^-^bas^e^{d en}^erg^y^cos^t^s^.
^{b. En}^erg^y^s^e^rv^{ice prices}^ref^l^{ect ch}^arg^e^s^f^o^{r en}^er^g^y^s^e^rv^ices^s^u^ch^asⁿ^a^tu^{ral g}^a^s^an^{d electricity}^.
Beyond the direct effect of rising energy prices on household spending, there are also
indirect effects on overall consumer prices that must be taken into account. All of the non-
energy goods and services consumed by households rely to some degree on energy for their
production. It takes energy to run a plant, and gasoline to fuel trucks and other forms of
transport to take goods to the store to sell. Higher energy prices to manufacturers may be
passed through to the consumer and thus increase overall inflation rates of goods and
services. The consumer price index, excluding energy, has been rising in recent years,
increasing from 1.5% in 2003 to 2.8% in 2007, suggesting that higher energy prices are
affecting other areas of consumption as well.
Impact of Higher Energy Costs on Older Americans
Older households account for approximately 20% of our nation’s total consumption
on energy-related products. Yet, they are disproportionately affected by higher energy
costs. Although in actual dollar terms older households spend slightly less on energy-
related consumption than households headed by a person under age 65, they spend a
higher share of their income on energy-related expenditures. As shown in Table 3, in
2006, older households spent 9.5% of their income on energy-related services compared
to 7.4% for younger households in 2006.
Among older households, lower-income elderly spend significantly more as a share
of income for energy-related services compared to those with higher incomes. Older
households with less than $15,000 in household income spent approximately 20% of their
income for energy-related expenditures, as compared to 7.3% for elderly households with
incomes over $15,000 in 2006. For utilities and fuel, these same households spent 13% of
their income to heat and operate their homes, compared to only 4.7% for older households
with $15,000 or more in income (see Table 4). The $15,000 threshold for household
income in Table 4 is a close approximation to older households that have incomes below

or near 150% of poverty.⁵ The 150% of poverty threshold is used by current public
programs that provide low-income energy assistance to households (see discussion below).
In 2006, about 22% of older Americans had family incomes below 150% of the poverty
thresholds.⁶ These estimates are for 2006 and do not reflect the additional 17% increase
in energy prices that occurred in 2007.
Table 3. Average Annual Household
Energy Expenditures By Age, 2006
Age of Head of
Household
Under 6565+
Utilities and Fuel Expenditures$1,931$1,837
Natural Gas$509$507
Electricity $1,293 $1,154
Fuel Oil and Other Fuels$129$176
As a Share of Income2.9%4.8%
Transportation Expenditures
Gasoline and Motor Oil$2,436$1,359
As a Share of Income4.5%4.7%
Total Energy Expenditures$4,367$3,196
As a Share of Income7.4%9.5%
^Source:^C^R^S^cal^cu^l^a^tⁱ^oⁿ^s^f^r^om^{2006 BL}^S^Co^nsu^m^{er Ex}^pen^dⁱ^t^u^res
^Sur^v^ey^d^a^ta.
Over time, growth in energy expenditures has increased faster than income of older
households (see Figure 1). However, among older households, the data indicate that
energy-related spending for low-income households is not increasing as fast as overall
energy prices or energy-related spending for higher-income households. Average annual
energy-related spending for low-income households (after adjusting for inflation) has
increased only 5.9% since 2000, compared to 20% for higher-income households (see
Table 4). This difference may reflect lower-income households changing their behavior
in response to rising energy costs. According to an AARP survey, older Americans with
household incomes below $25,000 are significantly more likely to reduce their savings⁷
and other spending to offset higher gasoline prices. Other alternatives that households
explore in response to rising energy costs have included replacing heating and cooling
systems with more energy-efficient units, installing energy-efficient windows, and
purchasing more fuel-efficient cars. Although these alternatives may save costs in the
longer-run, many lower-income households do not have sufficient funds to purchase them.

⁵ The average size of households with less than $15,000 in income is 1.2. For example, if 80%
are living alone and 20% are married and the poverty thresholds of $9,669 for single and $12,201
for married are weighted (.80*$9,669+.20*$12,201=$10,175), then 150% of the weighted
poverty threshold ($10,175) would equal $15,263 or approximately $15,000.
⁶ See CRS Report RL32697, Income and Poverty Among Older Americans in 2006, by Patrick
Purcell.
⁷ AARP, “The Effects of Gasoline Costs on U.S. Residents Age 50+,” September 2005.

Table 4. Average Annual Energy Expenditures Relative to
Household Income, For Older Households
2000/2001 2005/2006
Household IncomeHousehold Income
Under $15,000 Under $15,000
$15,000and Over$15,000and Over
Utilities and Fuel 11.6%4.1%13.0%4.1%
As a Share of Income
Gasoline and Motor Oil4.4%2.5%6.3%3.2%
As a Share of Income
Total Energy Expenditures $1,796$2,913$1,903$3,486
(In 2006 $)
Growth Rate (2000 to 2006)———— 5.9%20.0%
Total Energy Expenditures 16.1%6.9%19.2%7.3%
As a Share of Income
^Source:^{CRS calcu}^latioⁿ^s^f^r^o^m^B^u^r^eau^o^f^L^a^b^o^r^{Statistics Co}ⁿ^s^u^m^er^Ex^p^eⁿ^d^itu^r^e^Su^r^v^ey^d^a^ta^f^o^r^select
^y^ears^.
Figure 1. Growth in Energy-Related Expenditures Relative to
Growth in Household Income, for Older Households

15%

10%ge
5%han
C
0%ent
c
-5%er
P
-10%
2001 2002 2003 2004 2005 2006
^G^r^ow^t^h^{In E}ⁿ^e^r^g^y^E^x^p^e^ndi^t^u^re^s⁽²^006$)^G^r^ow^t^hⁱⁿ^H^o^us^e^hol^d^Inc^o^m^e^(2006$)
^Source:^B^L^{S C}^oⁿ^s^u^m^{er Ex}^pen^d^itu^{re Su}^rv^ey^an^{d U.S. B}^u^reau^of^C^eⁿ^s^u^s^{, s}^e^{lect y}^ears^.
Implications for Public Programs
The key public program that provides energy assistance to low-income households
is the Low-Income Home Energy Assistance Program (LIHEAP). LIHEAP was
established in 1981 (P.L. 97-35) and is a block grant program under which the federal
government makes annual grants to states, territories, and tribes to operate home energy
assistance programs for low-income households. The LIHEAP statute authorizes two
types of funds: block grant funds, which are allocated to all states using a statutory
formula, and contingency funds, which are allocated to one or more states at the discretion
of the Administration.

Federal law limits LIHEAP eligibility to households with incomes up to 150% of the
federal poverty guidelines (or, if greater, 60% of the state median income). States may
adopt lower income limits, but no household with income below 110% of the poverty
guidelines may be considered ineligible.⁸ In FY2004 (the most recent year for which data
are available), 40% of low-income households eligible for LIHEAP had a member aged

60 or older.⁹

Over time, while energy costs have risen as a share of income, public programs like
LIHEAP have faced declining funding. While utility and fuel expenditures have
increased 34.6% from 2000 to 2005, the average benefit for LIHEAP has increased 12.6%
over the same time period.¹⁰ These estimates do not include growth rates between 2005
and 2007, during which time energy prices increased another 20.8%.
In the FY2008 Consolidated Appropriations Act (P.L. 110-161), Congress
appropriated $1.98 billion in LIHEAP funds and an additional $590 million in
contingency funds. In the 110^th Congress, two bills have been introduced that would
appropriate an additional $1 billion in LIHEAP contingency funds. Both bills, H.R. 4275
and S. 2405, are entitled the “Keeping Americans Warm Act.” In addition, a number of
bills have been introduced that would provide additional funds for LIHEAP through
various means, including penalties collected from energy suppliers and profits from
carbon allowance trading.¹¹
S. 1238, the “Energy Security and Corporate Accountability Act of 2007,” has also
been introduced in the 110^th Congress and would allow low-income households eligible
under the LIHEAP program to be eligible for state funds to assist them in paying
transportation expenses associated with gasoline and motor oil purchases as well as public
transportation.

⁸ For more detail on LIHEAP and spending by state, see CRS Report RL31865, The Low-
Income Home Energy Assistance Program (LIHEAP): Program and Funding, by Libby Perl.
⁹ FY2004 LIHEAP Report to Congress, May 25, 2007, p. 20.
¹⁰ Utility and fuel expenditures growth based on BLS Consumer Expenditure Survey, LIHEAP
growth rates based on CRS Report RL31865.
¹¹ See CRS Report RL31865.