Why U.S. gasoline prices are at record levels and why they’ll stay high for so long

A number of factors are pushing up prices, with regular gasoline hitting a record $4.67 a gallon Wednesday, according to the AAA survey.

Natural gas prices are expected to breach the $4-a-gallon mark for the first time since 2008, regardless of whether shots are fired in Eastern Europe or economic sanctions are imposed on Russia.

Tom Kloza, global head of energy analysis at OPIS, which tracks AAA gas prices, said there were a number of reasons besides disruptions to Russian oil exports pushing up prices. It has proven difficult to predict price movements. Wednesday’s record was already higher than Kloza had expected prices to reach a few weeks ago. With school holidays and summer travel increasing, so will gasoline demand and prices, he said.

“Anything is from June 20 to Labor Day,” Kloza said.

Here are the reasons behind the record price surge:

Russia invades Ukraine

Russia is one of them largest oil exporter on this planet. In December, it shipped nearly 8 million barrels of oil and other petroleum products to global markets, including 5 million barrels of crude oil.

Few of them went to America. In 2021, Europe gets 60% of its oil and 20% goes to China. But oil is priced according to global commodity markets, so the loss of Russian oil affects global prices wherever it is used.

Concerns about disrupting global markets have led Western countries to initially Relief from sanctions on Russian oil and gas They protested the invasion on the spot.
But in March, the United States announced a Formal ban on all Russian energy imports. Monday EU announces ban on imports Russian oil is transported by ship and accounts for about two-thirds of European countries’ oil imports from Russia.Russia’s oil is slowly but surely Exit the global market.

China’s lockdown ends

One factor controlling oil prices is the surge in Covid cases, and Strict Lockdown Rules in most parts of the country. This is a serious drag on oil demand.
But as the Covid-19 surge begins to subside, Blockade is being lifted in big cities like Shanghai. And more demand without increasing supply just pushes up prices.

Reduce oil and gas from other sources

Oil prices plunged in spring 2020 as global pandemic-related stay-at-home orders weighed on demand, while crude trade at negative prices briefly. In response, OPEC and its allies, including Russia, agreed to cut production as a way to support prices.Even if demand recovers faster than expected, they Keep production targets low.
American oil companies do not comply with these types of state-mandated production targets.but they have Reluctance or inability to resume oil production at pre-pandemic levels because of fears stricter environmental rules May cut future demand. Many of these stricter rules have been scaled back or failed to become law.

“The Biden administration is suddenly interested in more drilling, not less,” said Robert McNally, president of consulting firm Rapidan Energy Group, earlier this spring. “People are more worried about high oil prices than anything else.”

Expanding production takes time, especially when oil companies face the same problems supply chain and Hiring Challenges Like thousands of other American businesses.

“They couldn’t find people and they couldn’t find equipment,” McNally added. “It’s not that they can be sold at high prices. They’re just not available.”

Oil stocks have generally lagged the broader market over the past two years, at least until the recent price rally. Oil company executives would rather find ways to boost share prices than increase production.

Oil stocks are the new FAANG

“Oil and gas companies don’t want to drill more wells,” Raymond James analyst Pavel Molchanov said earlier this spring. “They’re facing pressure from the financial world to pay more dividends and take more stock. Buybacks instead of the proverbial ‘baby drills’ like they would have done 10 years ago. Corporate strategy has fundamentally changed.”

One of the most obvious examples: Exxon Mobil (XOM) First-quarter profit reported last month was $8.8 billion, more than triple the level a year earlier if special items were excluded.It also announced a $30 billion share repurchase programfar exceeding the $21 billion to $24 billion it expects to spend on all capital investments, including the search for new oil.

More than just oil production lU.S. refining capacity, which lags pre-pandemic levels, is declining. Today, the amount of oil that can be processed into gasoline, diesel, jet fuel and other petroleum products is reduced by about 1 million barrels per day.

State and federal environmental regulations are prompting some refiners to switch from oil to low-carbon renewable fuels. Some companies are closing older refineries instead of investing in retooling equipment to keep costs afloat, especially with large new refineries set to open overseas in Asia, the Middle East and Africa in 2023.

And the fact is diesel engine Jet fuel prices have risen far more than gasoline prices, a sign that refiners are shifting more production to these products.

“Economics requires you to produce more jet and diesel fuel than gasoline,” Kloza said.

Strong demand for natural gas

But supply is only part of the price equation. Demand is another key, which, while very strong at the moment, has yet to return to pre-pandemic levels.

The U.S. economy has record job growth in 2021, and those income has slowed, but remains historically strong.Demand is getting another boost as many employees have been working from home for most of the past two years come back to the office.
The start of the summer travel season on Memorial Day weekend could spark typical annual increases in natural gas and jet fuel.American Airlines reported very strong booking summer travel, even with Air tickets higher than pre-pandemic levels.

The end of the Omicron surge and the lifting of many Covid restrictions are encouraging people to get out of their homes for more shopping, entertainment and travel. U.S. passenger car trips have increased 10 percent since the start of the year, according to mobility research firm Inrix.

Commuting may be down slightly. Many people planning to return to the office will only be there three or four days a week, and the total number of jobs is still slightly below 2019 levels. But Kloza predicts that there will likely be a period of higher demand for natural gas this summer compared to comparable periods before the pandemic.

“I was looking forward to breaking records even before Ukraine,” Kloza said. “The question now is how many records have we broken.”