Why are Gas Prices High for a Long Time?
– Why are Gas Prices High –
Many factors are combined to push gas prices up to a record. This informative article covers everything you seek to know. Keep reading for more on why gas prices are so high, what Russia has to do with the sudden price increase, how high gas prices might go. And a couple of answers to your questions.
Why are Gas Prices So High?
International gas prices have experienced a roller coaster ride in the past year, from historic lows to unprecedented highs. In this OIES Comment, we analyze the drivers behind this pricing fluctuation, and offer an outlook for the coming winter.
In order to avoid the distorting effects of the COVID-19 pandemic in 2020, we compare the year to date (January-August) 2021 with the same period in 2019.
On the global LNG market, the supply-side increase in nameplate export capacity was offset by outages at a number of export plants. By contrast, LNG demand outside Europe surged.
This meant that growth in supply simply did not keep pace with the increase in demand. With Europe as the ‘balancing market’ for global LNG.
Its role as the absorber of excess volumes in 2019 was reversed in 2021, as European LNG imports declined.
On the European market, a decline in European production and pipeline imports from regional suppliers, most notably Russia accompanied the decline in LNG imports.
Yet demand remained at the same level as 2019, and the gap was met by net storage withdrawals.
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New York (CNN Business)
Russia’s invasion of Ukraine is a major reason that US drivers are paying record prices for gasoline. But it’s not the only reason.
Numerous factors are combining to push gas prices up to a record. Gas hit $4.25 for a gallon of regular gas, according to AAA’s survey Wednesday.
Gas prices were already expected to breach the $4 a gallon mark for the first time since 2008, with or without shots fired or economic sanctions imposed in Eastern Europe.
Now, because so many factors are at play simultaneously, drivers should prepare to pay uncomfortably high gas prices through at least 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 of the question.
What is Behind the Record Price Surge?
Prices could easily reach $4.50 a gallon before they start to retreat, and even a $5 per gallon national average is not out of the question.
1. Russia’s Invasion of Ukraine
Russia is one of the largest oil exporters on the planet. In December it sent nearly 8 million barrels of oil and other petroleum products to global markets, 5 million of them as crude oil.
Very little of that went to the United States. Europe got 60% of the oil and 20% went to China in 2021. But oil is priced on global commodity markets, so the loss of Russian oil affects oil prices around the globe, no matter where it is used.
The concerns about disrupting global markets led western nations to initially exempt Russian oil and natural gas from the sanctions they put in place to protest the invasion.
Despite that carve out, much of Russia’s oil is going unsold on global markets. Traders are reluctant to bid for it when it’s not clear that any deal can be closed, given the sanctions on Russia‘s banking system. There have also been difficulties finding any tankers able or willing to call on Russian ports.
This has resulted in a de facto ban on Russian oil in global markets, with investors pricing crude as if the country’s supply isn’t available.
On Tuesday the United States announced a formal ban on all Russian energy imports. The UK government said it, too, will phase out Russian oil imports by the end of 2022 and explore ways of ending natural gas imports.
There is growing political pressure on the rest of Europe to join a formal ban on Russian oil. Russia supplies about 27% of the 27-nation EU’s oil imports.
While oil prices moved somewhat higher on the US and UK moves, a European ban could drive global prices up further due to concerns the restriction will stay in place indefinitely, even once the fighting in Ukraine stops. Oil is generally traded as futures pegged to delivery.
2. Rising Gas Prices
Gas prices have shot up at the fastest pace since the aftermath of Hurricane Katrina in 2005. The weekly average price is now $4.10 a gallon, nearing the record high of $4.11 reached in 2008.
The price of a barrel of Brent crude, the closely watched benchmark used in Europe, closed Monday at $123.21, up 27% since the start of fighting just 12 days ago.
West Texas Intermediary oil, the US benchmark,closed at $119.40 a barrel Monday, up 30% over the same timeframe.
Less oil and gasoline from other sources
When pandemic-related stay-at-home orders around the world crushed demand for oil in the spring of 2020, oil plunged, briefly trading at negative prices.
OPEC and its allies, including Russia, agreed to slash production as a way to support prices. Even when demand returned sooner than expected, they kept production targets low.
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US oil companies don’t follow those types of nationally mandated production targets. But they have been reluctant or unable to resume producing oil at pre-pandemic levels.
Amid concerns about the prospect of tougher environmental rules that could cut future demand. Many of those tougher rules have been scaled back or failed to become law.
Record gas prices feel like a slap in the face. And there's more to come
“The Biden administration is suddenly interested in more drilling, not less,” said Robert McNally, president of consulting firm Rapidan Energy Group. “People are more worried about high oil prices than anything else.”
It takes time to scale up production, particularly when oil companies are facing the same supply chain and hiring challenges as thousands of other US businesses.
“They can’t find people, and can’t find equipment,” McNally added. “It’s not like they’re available at a premium price. They’re just not available.”
The Skyrocketing
The average price of gas in the US finally paused this weekend, settling at the record high of $4.33 that was set on Friday. In fact, the price actually dropped fractions of a cent on Saturday and Sunday, per AAA.
Drivers may welcome the weekend respite, but the price still sits at 88 cents more than a month ago and $1.47 more than the same time last year.
As the war in Ukraine continues and the US bans Russian oil, American gas prices have spiked, setting record highs for five days in a row.
The military conflict in Ukraine, combined with increased demands and seasonal maintenance, has created a pricing problem that gas experts don’t expect to be solved in the near future.
What You Need to Know About Gasoline Prices
Here’s what you need to know about gasoline prices, including how high they could go, how the Ukraine crisis and other factors are affecting them, and what the Biden administration is doing about it.
For more, learn how to save money on gas, see CNET’s list of best gas stations and get the best deals on gas credit cards.
Oil stocks have generally lagged the broader market over the last two years, at least until the recent run-up in prices.
Oil company executives wanted to redirect cash to buying back stock and other ways to help their share price rather than increase production.
“Oil and gas companies do not want to drill more,” said Pavel Molchanov, an analyst at Raymond James.
“They are under pressure from the financial community to pay more dividends, to do more share buybacks.
Instead of the proverbial ‘drill baby drill,’ which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed.”
US Refining Capacity
Not only is oil production lagging behind pre-pandemic levels, there’s also less US refining capacity. Today, about 1 million fewer barrels of oil a day are available to be broken into gasoline, diesel, jet fuel and other petroleum-based products.
State and federal environmental rules are prompting some refineries to switch from oil to lower carbon renewable fuels.
And some companies are closing older refineries rather than invest the money it would cost to retool to keep them operating, especially with massive new refineries set to open overseas in Asia, the Middle East and Africa in 2023.
And major US refineries have yet to return to full operation after two were damaged by hurricanes last year and another by an explosion.
How High will Gas Prices Go?
Prices at the pump Sunday averaged $4.33 a gallon. To fill up a typical 15-gallon gas tank, that would take about $65 over $20 more than a year ago, when gas was only $2.85 a gallon.
And that’s just the national average: In California, gas is already averaging $5.74 a gallon, and it’s above the national average in at least another 18 states.
The next threshold analysts are keeping an eye out for is $4.50 a gallon nationwide.
Patrick de Haan, GasBuddy head of petroleum analysis, predicts the inflated prices will be here for months.
“Americans have never seen gasoline prices this high, nor have we seen the pace of increases so fast and furious.
That combination makes this situation all the more remarkable and intense,” de Haan said in a statement.
President Biden announced a ban on Russian oil imports as part of ongoing sanctions.
The UK said it’ll begin “phasing out” Russian energy products, excluding gasoline, and the European Commission has committed to slashing gas imports from Russia by two-thirds in 2022.
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US Government Prediction
The US government’s Energy Information Administration now predicts Brent oil will average over $100 a barrel for the remainder of 2022.
But, the agency added, its forecasts could change greatly if additional European countries sanction Russian oil.
Bjørnar Tonhaugen, head of oil markets for Rystad Energy, says that if enough European countries join the embargo, oil could hit $240 a barrel by the summer
“It would create a 4.3 million barrels-per-day hole in the market that simply cannot be quickly replaced by other sources of supply,” Tonhaugen wrote in a note.
Even at $200 a barrel, experts see gasoline prices averaging $5.84 per gallon, according to NPR. Oil at $240 would trigger a global recession later this year, Tonhaugen said.
At that point demand would be forced down, he added, and the price would fall steeply.
“The higher prices go, the larger the chances of the global economy entering a recession already in the fourth quarter of 2022,” he said.
Strong Demand for Gasoline
Record job gains in 2021, and the strongest economic growth since 1984, have combined to fuel the rebound in driving, as did pent-up demand for travel after the first year of the pandemic.
Job gains have remained strong so far in 2022. And as many workers who have been working from home much of the last two years return to the office, demand is getting another boost.
“Jobs numbers have been pretty impressive and a lot of [workers] will be driving to work somewhere,” said Tom Kloza, global head of energy analysis for the Oil Price Information Service.
“There’s also going to be more people not working remotely than there were last year or even last month. I don’t know how to put a number on that, but that is certain to add to demand.”
The end of the Omicron surge and the removal of many Covid restrictions is encouraging people to get out of the house for more shopping, entertainment and travel well.
US trips in passenger vehicles have increased 25% since the beginning of this year, according to the mobility research firm Inrix.
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There may not be quite as much commuting as before the pandemic. Many who plan to return to the office will be there only three or four days a week, rather than five. The total number of jobs is still slightly below 2019 levels.
But there will be periods, most likely this summer, where there will be more demand for gas than during comparable periods before the pandemic, Kloza predicts.
Tight supplies and strong demand were likely to push prices above $4 even without the current disruption caused by the war.
“Even before Ukraine, I was expecting to break the record,” Kloza said. “Now it’s a question of how much we break the record by.”
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Frequently Asked Questions
Ques: Why is gas so expensive in the Bay Area?
Most of what makes gas more expensive in the Bay Area is true statewide as well: The price is high because of higher taxes and stricter environmental restrictions.
California taxes on gasoline involve a combination of state and local charges:
Gasoline excise tax of 41.7 cents a gallon (47.3 cents after July 1)
Gasoline sales tax: 2.25%
Local sales taxes, which in the Bay Area range up to 2.5%
Underground storage tank maintenance fee: 2 cents a gallon
Adding together all those charges comes to something in the neighborhood of 55 cents per gallon, according to the American Petroleum Institute.
Keep in mind we also pay a federal excise tax of 18.4 cents per gallon on top of all that.
Ques: Why does California have the highest gas price in the USA?
The situation with California gasoline prices is complicated.
From the top:
(1) Insanely high taxes. California has nutty state taxes on Gasoline. I mean really wildly insanely high.
(2) California doesn’t want to be part of the United States of America. They would prefer to import oil from the Middle East.
When the people in States like Texas, Alabama, Louisiana, North Dakota, etc would be all to happy to sell it to them cheaper and we would ship it by pipeline if California wasn’t insane and hateful to the rest of the USA.
This would really cut their gas prices.
(3) California is “over the mountains”. To truck in gasoline from the eastern of California is too expensive for freight cost.
(4) California has oil but they don’t want to Frac it and they don’t want to refine it. So they could solve the problem inside the state.
(5) California’s lunatics are trying to force out gasoline cars.
(6) Californians have no common sense on energy so their legislature passes stupid energy laws.
Ques: Why is Joe Biden being blamed for ‘rising gas prices’?
Mr. Biden warned that his ban on imports of Russian oil, gas and coal, announced on Tuesday as a response to Russia’s invasion of Ukraine, would cause gas prices to rise further.
High costs are expected to last as long as the confrontation does.
While Republican lawmakers supported the ban, they asserted that the pain at the pump long preceded the war in Ukraine.
Gas price hikes, they said, were the result of Mr. Biden’s cancellation of the Keystone XL pipeline, the temporary halt on new drilling leases on public lands.
And the surrendering of “energy independence” — all incorrect assertions.
Ques: Why are gas prices rising this fall?
Gasoline prices follow oil to a great extent. Demand in much of the world is returning to normal as the pandemic subsides.
If Russia continues its aggression towards Ukraine, oil prices will likely remain elevated.
But that’s what Putin wants since Russia depends heavily on petroleum exports for its budget.
Ques: Why are gas prices skyrocketing in 2021?
The reasons for the price spike are textbook supply and demand from an economics textbook:
Americans have gotten back to driving more this summer as the pandemic has moderated.
And a combination of domestic supply interruptions and trouble in energy markets overseas have made crude oil more expensive.
Ques: Will fuel-saving devices push gas prices higher?
If a fuel saving device actually works and is widely adopted, the obvious implication is that fuel consumption would broadly drop.
This lowers demand, giving consumers more power and driving down the price of a limited natural resource like petroleum.
In real life, it’s more complicated. First of all, history shows that fuel-saving devices don’t always lower fuel consumption.
In many cases, people will drive more, buy less fuel-efficient vehicles, and/or drive in ways that use more fuel. That means that fuel consumption may be a wash, meaning that prices wouldn’t be impacted.
Thing is, it’s even more complex than that. If fuel use goes down, petroleum producers (OPEC being the primary one), will often cut production in order to keep supply close to demand, and keep prices up.
AND, if fuel use were to go down far enough, producers would start going out of business.
Which seems reasonable, if we aren’t using as much fuel, we don’t need as many producers, but that can ultimately impact the economies of scale.
If we got to a place where we were using fall less petroleum than we are now, it’s plausible that prices could end up being higher.
The simple answer is that using less lowers prices, but that’s not a universal truth.
This sudden increase in Gas price will definitely affect everything and everyone around it. We can only pray the provoking cause is amicably settled.
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CSN Team.
