Fuel prices are continuing to set new highs and are still hurting the average American’s wallet. According to AAA, the national average for standard gasoline set a new high of $4.48 per gallon on Monday. This is up 15 cents in the last week and up 40 cents in the previous month.
A number of factors contribute to this, but it’s important to point out that gas prices have increased by 27% since the day Russia invaded Ukraine. On Monday, Andy Lipow, president of Lipow Oil Associates, said, “Everything is pointing toward even higher prices. We are all on our way toward $5.” And, of course, we’re approaching Memorial Day, a holiday that’s typically high in road travel.
In fact, according to AAA, the average price of gasoline in four states has already surpassed $5 a gallon: California, Washington, Nevada, and Hawaii; Oregon is only a penny’s worth away.
What does this mean for both the oil market and those who suffer at the pump? What should we keep in mind looking forward?
Americans who’ve heard that the U.S. is “energy independent” are perplexed as to why producers can’t simply open the taps and lower costs. “Energy independence,” however, isn’t written in stone. Oil (and other commodities) are traded through international markets, with prices determined by global supply and demand. As we’ve witnessed, any supply or demand shock impacts worldwide pricing. Drillers in the U.S. also overproduced oil and natural gas for a number of years, subsidizing low pump prices by losing hundreds of billions of dollars from 2015 to 2020.
It’s worth noting that, when accounting for inflation, fuel prices are not technically at all-time highs. According to the U.S. Energy Information Administration, the inflation-adjusted record was established in June of 2008, when they averaged $5.38 per gallon – which some of us remember well. Nonetheless, the recent increase threatens to exacerbate inflation concerns for households and the overall economy.
President Biden recently approved a massive oil release from the United States’ reserves, with other countries expected to follow suit. By November, this may add roughly 240 million barrels to the global oil supply. Although this is tiny compared to global oil use, the International Energy Agency notes that crude prices have fallen by around $10 per barrel as new oil enters the market.
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Sadly, the bad news remains in that oil prices have not decreased. On Monday, oil prices climbed into the triple digits, heightening the prospect of substantially higher gas costs in the near future. As the globe recovers from the pandemic, energy demand continues to rise. According to the International Energy Forum and the Joint Organizations Data Initiative (JODI), oil demand in March was 101% of 2019 levels, despite China’s lockdowns. However, supply continues to lag, with output just 97% of what it was in 2019.
Many investors in energy have reduced their expected return timeframes, compelling corporations to focus on dividend increases and stock buybacks. The supply of oil products like gasoline has failed to meet demand, partly due to a lack of firepower from refineries after recent closures. According to the Energy Information Administration, the U.S. has lost 5.5% of its refinery capacity in the last two years.
The most significant development that would cut prices would be resolving the Russia-Ukraine conflict. That does not appear to be happening anytime soon, and accumulating evidence of war crimes in Ukraine may make lifting sanctions impossible as long as Vladimir Putin remains in power. However, if Putin were to leave, it would provide a tremendous opportunity to halt the conflict and begin repairing the damage to the global marketplace.
Meanwhile, if China weren’t reeling from massive pandemic-related shutdowns, oil and gasoline prices would be far higher. According to the Eurasia Group, low Chinese demand is putting a “ceiling” on oil prices, at least for the time being. However, if China recovers and the squeeze on Russian oil deepens, this could be yet another factor in $5-per-gallon gas prices becoming a more obvious reality. It seems that our best option as U.S. citizens and investors is to play it safe. Let’s keep our budgets reasonable and stay informed. As individuals, we don’t have much control over the situation, which would make it wise to embrace an optimistic outlook. And, let’s never forget how resilient of a nation we are.
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