Why US gas prices are at a record and why they will stay high for a long time

Why US gas prices are at a record and why they will stay high for a long time

Numerous factors are driving prices up, with regular gas hitting a record high of $4.67 a gallon on Wednesday according to the AAA survey.

Gasoline prices were already expected to break the $4-a-gallon mark for the first time since 2008, with or without shots fired in Eastern Europe or economic sanctions imposed on Russia.

That’s because there are a number of reasons other than the disruption of Russian oil exports driving prices higher according to Tom Kloza, global head of energy analysis at OPIS, which tracks gas prices for AAA. And making predictions about where prices will go has proven difficult.

Wednesday’s record is already higher than Kloza’s a few weeks ago that expected prices would reach. As classes end and summer travel resumes, so will the demand and price of gasoline, he said.

“Anything goes from June 20 through Labor Day,” Kloza said.

Here’s what’s behind the record price increase:

Russia’s invasion of Ukraine

Russia is one of the largest oil exporters on the planet. In December, it shipped about 8 million barrels of oil and other oil derivatives to world markets, 5 million of them in crude form.

Very little of that went to the United States. In 2021 Europe kept 60% of the oil and 20% went to China. But oil is priced on world commodity markets, so the loss of Russian oil affects prices around the world, no matter where it is used.

Concerns about disrupting global markets prompted Western nations to initially exempt Russian oil and natural gas from sanctions they imposed to protest the invasion.

But in March, the United States announced a formal ban on all imports of Russian energy. And on Monday, the EU announced a ban on imports of Russian oil by ship, which accounted for about two-thirds of the oil that European nations imported from Russia. Russia’s oil is slowly and steadily being withdrawn from global markets.

End of the lockdown in China

One factor that has kept oil prices in check has been rising covid cases and strict lockdown rules across much of the country. That was a big drag on oil demand.

But as the rise of Covid has started to recede, lockdowns are being lifted in major cities like Shanghai. And more demand without more supply can only drive up prices.

Less oil and gas from other sources

Oil prices tumbled as pandemic-related stay-at-home orders around the world crushed demand in the spring of 2020, with crude briefly trading in negative prices.

In response, OPEC and its allies, including Russia, have agreed to cut output as a way to support prices. And even as demand returned earlier than expected, they kept production targets low.

American oil companies don’t adhere to those kinds of nationally mandated production targets. But they have been unwilling or unable to resume oil production at pre-pandemic levels amid concerns that tougher environmental rules could reduce future demand. Many of those stricter rules have been relaxed or not signed into law.

“The Biden administration is suddenly interested in more drilling, not less,” Robert McNally, president of consultancy Rapidan Energy Group, said earlier this spring. “People are more worried about high oil prices than anything else.”

It takes time to ramp up production, particularly when oil companies face the same supply chain and hiring challenges as thousands of other US companies.

“They can’t find people or equipment,” McNally added. “It is not that they are available at a higher price. They just aren’t available.”

Oil stocks have generally underperformed the broader market for the past two years, at least until the recent price surge. Oil company executives would rather find ways to increase their share price than increase production.

“Oil and gas companies don’t want to drill any more,” Pavel Molchanov, an analyst at Raymond James, said earlier this spring. They are under pressure from the financial community to pay more dividends, to do more share buybacks, instead of the proverbial ‘baby drill,’ which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed.

One of the crudest examples: exxonmobil (XOM) last month it announced first-quarter profit of $8.8 billion, more than triple the level of a year ago when special items are excluded. He also announced a $30bn share buyback plan, far more than the $21bn to $24bn he expects to spend on all capital investments, including finding new oil.

Not just oil production yoExceeding pre-pandemic levels, US refining capacity is falling. Today, roughly 1 million fewer barrels of oil per day are available to be processed into gasoline, diesel, jet fuel, and other petroleum products.

State and federal environmental regulations are prompting some refiners to switch from oil to lower-carbon, renewable fuels. Some companies are closing older refineries rather than invest what it would cost to restructure to keep them running, especially with massive new refineries set to open overseas in Asia, the Middle East and Africa in 2023.

And the fact that diesel and jet fuel prices have risen much more than gasoline prices shows that refiners are shifting more of their production to those products.

“The economy demands that more jet fuel and diesel be produced at the expense of gasoline,” Kloza said.

Strong demand for gasoline

But supply is only part of the price equation. Demand is the other key, and while it’s very strong right now, it’s still not back to pre-pandemic levels.

The US economy saw record job growth in 2021, and while those gains have slowed, they remain historically strong. Demand is getting another boost as many employees who have been working from home for much of the past two years return to the office.

The start of the summer travel season on Memorial Day weekend is likely to trigger typical annual increases in demand for gasoline and jet fuel. All US airlines are reporting very strong bookings for summer travel, even with airfares exceeding pre-pandemic levels.

The end of the Omicron surge and the lifting of many Covid restrictions is encouraging people to leave home for more shopping, entertainment and travel. US travel in passenger vehicles has increased 10% since the beginning of this year, according to mobility research firm Inrix.

Commutes to work may remain slightly low. Many of those planning to return to the office will be there just three or four days a week, and the total number of jobs is still slightly below 2019 levels. But there will be periods, most likely this summer, with higher demand. of gas than during comparable periods before the pandemic, Kloza predicts.

“Even before Ukraine, I expected to break the record,” Kloza said. “Now it’s a question of how much we beat the record.”

Ben Oakley
Ben Oakley is the guy you can really trust when it comes to Mainstream News. Whether it is something happening at the Wall Street of New York City or inside the White House in Washington, D.C., no one can cover mainstream news like Ben. Get a daily dose of Trustworthy News by Ben Oakley, only at Globe Live Media.