Why US gas prices are at a record, and why they'll stay high for a long time | CNN Business

Why US gas prices are at a record, and why they’ll stay high for a long time | CNN Business


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 cause of the spike.

Numerous factors are pushing prices up, with regular gasoline hitting a record $4.40 a gallon Wednesday according to AAA’s survey.

Gas prices were already expected to breach 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.

The good news for drivers is that crude oil prices have been falling in recent days, amid concerns that China keeping Covid lockdowns in place to combat will continue to hurt oil demand. Gas prices could be near their highest point for the month, said Tom Kloza, global head of energy analysis for the Oil Price Information Service, which tracks gas prices for AAA.

But prices aren’t likely to fall much whenever they do start to retreat. And Kloza expects they could once again set a record after schools let out and drivers start hitting the road for vacations next month.

The national average price could easily hit $4.50 a gallon or even higher this summer, he believes. “Anything goes from June 20 to Labor Day,” Kloza said.

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

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. In 2021 Europe got 60% of the oil and 20% went to China. But oil is priced on global commodity markets, so the loss of Russian oil affects 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.

But in March the United States announced a formal ban on all Russian energy imports. The UK government, too, said it will phase out Russian oil imports by the end of 2022 and also explore ways to end natural gas imports. And Germany announced earlier this month it will support an EU ban on Russian oil. Russia’s oil is slowly and steadily being removed from global markets.

01:57
– Source:
CNN

This is what determines the price of gas

Oil prices plunged when pandemic-related stay-at-home orders around the world crushed demand in the spring of 2020, and crude briefly traded at negative prices. In response, OPEC and its allies, including Russia, agreed to slash production as a way to support prices. And even when demand returned sooner than expected, they kept production targets low.

US oil companies don’t adhere to those types of nationally mandated production targets. But they have been reluctant or unable to resume producing oil at pre-pandemic levels amid concerns that tougher environmental rules could cut future demand. Many of those stricter rules have been scaled back or failed to become law.

“The Biden administration is suddenly interested in more drilling, not less,” Robert McNally, president of consulting firm Rapidan Energy Group, said earlier this spring. “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.”

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 would rather find ways to boost their share price than increase production.

“Oil and gas companies do not want to drill 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 ‘drill baby drill,’ which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed.”

One of the starkest examples: ExxonMobil

(XOM) last month announced first quarter profits of $8.8 billion, more than triple the level of a year ago when excluding special items. It also announced a $30 billion share repurchase plan, far more than the $21 billion to $24 billion it expects to spend on all capital investment, including searching for new oil.

Not only is oil production lagging behind pre-pandemic levels, US refining capacity is falling. Today, about 1 million fewer barrels of oil a day are available to be processed 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. Some companies are closing older refineries rather than investing what 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 the fact that diesel and jet fuel prices are up far more than gasoline prices shows that refiners are shifting more of their production to those products.

“Economics mandate you make more jet and diesel fuel to the detriment of gasoline,” said Kloza.

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

01:40
– Source:
CNN

How to save money on gas by being more fuel efficient

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

The start of the summer travel season on Memorial Day weekend is likely to spark the typical annual increases in demand for gas and jet fuel. US airlines all report very strong bookings for summer travel, even with airfares climbing above pre-pandemic levels.

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. US trips in passenger vehicles have increased 10% since the beginning of this year, according to the mobility research firm Inrix.

Commuting may remain down slightly. Many who plan to return to the office will be there only 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 for gas than during comparable periods before the pandemic, Kloza predicts.

“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.”

#gas #prices #record #theyll #stay #high #long #time #CNN #Business

Leave a Comment

Your email address will not be published.