Why US gas prices spiked, and why they’ll stay high
Numerous factors are pushing prices up, with regular gasoline hitting a record $4.67 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.
That’s because there’s a number of reasons beside the disruption of Russian oil exports driving prices higher according to Tom Kloza, global head of energy analysis for the OPIS, which tracks gas prices for AAA. And making predictions about where prices will go has proved difficult. Wednesday’s record is already higher than Kloza a few weeks ago expected prices would reach. As school let out and summer travel picks up, so will gasoline demand and price, he said.
“Anything goes from June 20 to Labor Day,” Kloza said.
Here’s what’s behind the record price surge:
Russia’s invasion of Ukraine
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.
China lockdowns ending
Less oil and gas from other sources
“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.”
“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.”
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.
“Economics mandate you make more jet and diesel fuel to the detriment of gasoline,” said Kloza.
Strong demand for gas
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.
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.”
