Why US gas prices are at a record and
why they'll stay high for a long time
The invasion of Ukraine by Russia is a significant reason why gasoline prices in the United States are at all-time highs. It isn't, however, the only reason.
Several variables are converging to propel gas prices to all-time highs. According to a AAA poll released on Wednesday, the price of regular gas has risen to $4.25 per gallon.
With or without bullets fired or
economic sanctions imposed in Eastern Europe, gas prices were already set to
break the $4 per gallon threshold for the first time since 2008.
Because so many forces are at play at
the same time, motorists should expect to pay uncomfortably high gas prices at
least through Labor Day. Prices could easily reach $4.50 a gallon before they
start to retreat, and even a $5 per gallon national average is not out.
Invasion of Ukraine by Russia
Russia is one of the world's top oil
exporters. It shipped roughly 8 million barrels of oil and other petroleum
products to worldwide markets in December, including 5 million barrels of crude
oil.
Only a small portion of that was sent to
the United States. In 2021, Europe received 60% of the oil, while China
received 20%. However, because oil is valued on global commodity markets, the
loss of Russian oil has an impact on oil prices all around the world,
regardless of where it is consumed.
Western governments initially exempted
Russian oil and natural gas from the sanctions they imposed in response to the
invasion due to worries about disrupting global markets.
Despite this, much of Russia's oil
remains unsold on international markets. Traders are hesitant to bid for it
because the sanctions on Russia's financial system make it unclear whether any
deal can be concluded. Tankers that are able or willing to call on Russian
ports have likewise proven tough to come by.
As a result, there has been a de facto
restriction on Russian oil in global markets, with speculators pricing crude as
if the country's supply isn't available.
The US slapped a formal ban on all
Russian energy imports on Tuesday. The UK government has stated that it, too,
plans to phase out Russian oil imports by the end of 2022 and is looking at
measures to eliminate natural gas imports.
The rest of Europe is coming under
increasing political pressure to adopt a formal ban on Russian oil. About a
quarter of the oil imported by the EU's 27 member states comes from Russia.
While oil prices rose slightly as a
result of the US and UK actions, a European ban might push prices significantly
higher due to fears that the restriction will remain in place permanently, even
if the violence in Ukraine ends. Oil is often traded in the form of
delivery-linked futures.
The price of a barrel of Brent crude, a
frequently watched European standard, finished Monday at $123.21, up 27% since
the conflict began just 12 days ago. The US benchmark, West Texas Intermediate
oil, closed Monday at $119.40 a barrel, up 30% from the previous day.
Other sources of oil and gasoline are
used less.
In the spring of 2020, as a result of
pandemic-related stay-at-home orders around the world, oil prices plummeted,
momentarily trading at negative levels. To keep prices stable, OPEC and its
allies, notably Russia, agreed to cut supply. They maintained production
targets modest even when demand restored sooner than expected.
These types of government mandated
output targets are not followed by US oil firms. However, they have been
hesitant or unable to resume oil production at pre-pandemic levels due to fears
that stronger environmental regulations may reduce future demand. Many of the
stronger requirements have been watered down or never passed into law.
Gas costs are at an all-time high, which
feels like a slap in the face. And there's more on the way.
Gas costs are at an all-time high, which
feels like a slap in the face. And there's more on the way.
"The Biden administration is
suddenly interested in more drilling, not less," said Rapidan Energy Group
president Robert McNally. "High oil costs are causing more concern than
anything else."
Scaling up production takes time,
especially when oil companies face the same supply chain and employment hurdles
as tens of thousands of other US businesses.
"They can't find people or
equipment," McNally continued. "It's not like they're on sale for a
lot of money. They simply aren't available."
Over the last two years, oil stocks have
generally lagged the wider market, at least until the recent price surge.
Instead of increasing output, oil firm executives choose to divert funds to
stock buybacks and other strategies to boost their stock price.
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