Russia’s invasion of Ukraine is one of the main reasons US motorists are paying record prices for gasoline. But it is not the only cause of the spike.
A number of factors are pushing up prices, with regular gasoline hitting a record $4.40 a gallon on Wednesday, according to the AAA survey.
Fuel prices are expected to cross the $4-a-gallon mark for the first time since 2008, with or without gunfire in Eastern Europe or economic sanctions imposed on Russia.
The good news for motorists is that crude oil prices have dropped in recent days amid concerns that China, keeping Covid lockdowns in place to combat it, will continue to hurt oil demand.
Gas prices could be near their month highs, said Tom Kloza, global head of energy analysis at the Oil Price Information Service, which tracks gas prices for AAA.
But prices probably won’t drop much once they start to pull back. And Kloza hopes they can once again set a record after schools are cleared and drivers start hitting the road on vacation next month.
The national average price could easily reach $4.50 a gallon or more this summer, he believes. “Everything goes from June 20th to Labor Day (September 5th in the US),” Kloza said.
What’s behind the record price rise:
The Russian invasion of Ukraine
Russia is one of the biggest oil exporters on the planet. In December, it shipped nearly 8 million barrels of oil and other oil products to global markets, 5 million of them crude. Very little of it went to the United States.
In 2021, Europe took 60% of the oil and 20% went to China. But oil is quoted on global commodity markets, so the loss of Russian oil affects prices around the world, no matter where it is used.
Concerns over disruption to global markets prompted Western nations to initially exempt Russian oil and natural gas from the sanctions they put in place to protest the invasion.
But in March, the United States announced a formal ban on all Russian energy imports. The UK government has also said it will phase out Russian oil imports by the end of 2022 and will also explore ways to end natural gas imports.
And Germany announced earlier this month that it will support an EU ban on Russian oil. Russia’s oil is slowly and steadily being removed from global markets.
Less oil and gas from other sources
Oil prices plummeted as pandemic-related stay-at-home orders around the world crushed demand in spring 2020, and crude briefly traded at negative prices.
In response, OPEC and its allies, including Russia, agreed to reduce production as a way to support prices. And even when demand returned earlier than expected, they kept production targets low.
US oil companies do not adhere to these types of nationally required production targets. But they are unwilling or unable to resume oil production at pre-pandemic levels amid concerns that tougher environmental rules could reduce future demand. Many of these stricter rules have been reduced or not become law.
“The Biden administration is suddenly interested in more drilling, not less,” Robert McNally, chairman 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 are facing the same supply chain and hiring challenges as thousands of other US companies.
“They can’t find people and they can’t find equipment,” McNally added. “It’s not like they’re available at a premium price. They are just not available.”
Oil inventories have generally lagged the broader market for the past two years, at least until the recent price spike. 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, which is the way they would have done things 10 years ago. The corporate strategy has fundamentally changed.”
One of the most glaring examples: ExxonMobil last month reported first-quarter earnings of $8.8 billion, more than triple the level of a year ago, excluding specials. It also announced a $30 billion share buyback plan, far more than the $21 billion to $24 billion it expects to spend on all capital investment, including the search for new oil.
Not only is oil production lagging behind pre-pandemic levels, US refining capacity is falling. Today, about 1 million less barrels of oil per day are available to be processed into gasoline, diesel, jet fuel and other petroleum products.
State and federal environmental rules are prompting some refiners to switch from oil to low-carbon renewable fuels.
Some companies are shutting down older refineries rather than investing what it would cost to retool to keep them operating, especially with massive new refineries slated to open overseas in Asia, the Middle East and Africa in 2023.
And the fact that diesel and jet fuel prices are rising much more than gasoline prices shows that refiners are shifting more of their production to these products.
“Economics requires you to produce more jet fuel and diesel at the expense of gasoline,” Kloza said.
Strong demand for gas
But supply is only part of the pricing equation. Demand is the other key, and while it is very strong now, it has not yet returned 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 worked from home for most of the past two years return to the office.
The start of the summer travel season on Memorial Day weekend is likely to trigger the typical yearly increases in demand for gas and jet fuel. All US airlines report very strong bookings for summer travel, even with airfares rising above pre-pandemic levels.
The end of the Omicron outbreak and the removal of many Covid restrictions are encouraging people to get out of the house for more shopping, entertainment and travel. US travel in passenger vehicles has increased by 10% since the beginning of this year, according to mobility research firm Inrix.
The offset may remain a little low. Many planning to return to the office will only be there three or four days a week, and the total number of jobs is still a little below 2019 levels. But there will be periods, likely this summer, with higher demand for gas than comparable periods. before the pandemic, predicts Kloza.
“Even before Ukraine, I had hoped to break the record,” Kloza said. “Now it’s a question of how much we broke the record.”
Source: CNN Brasil
I am Sophia william, author of World Stock Market. I have a degree in journalism from the University of Missouri and I have worked as a reporter for several news websites. I have a passion for writing and informing people about the latest news and events happening in the world. I strive to be accurate and unbiased in my reporting, and I hope to provide readers with valuable information that they can use to make informed decisions.
