Why gas prices are so high


$1

$2

$3

$4

$5 per gallon

1980

1990

2000

2010

2020

Regular gas monthly average price

Average June forecast

$4.59 per gallon

Adjusted for inflation

Not adjusted

Source: Energy Information Administration

Note: Inflation-adjusted prices are in June 2022 dollars. The average price for June is a forecast.

Gas prices in the United States are at record highs. And even taking inflation into account, they are on average at levels rarely seen in the past 50 years, including during the energy crisis of the late 1970s. When fuel prices rise, consumers are affected directly at the pump, but also indirectly when higher transportation costs increase the prices of everything from food to diapers to building materials.

The price of crude oil is now the most important factor driving the surge. In April, according to the Energy Information Administration, the cost of feedstock was 60% of the price of a gallon of regular gasoline. That compares to 52% in the same period a year ago and just 25% in April 2020 – when the pandemic sapped demand for fuel, along with most other goods and raw materials.

What goes into the price of gas

Monthly input costs for a gallon of regular gasoline, US average

Distribution and marketing

The rising cost of oil is the most important driver of gas prices.

Source: Energy Information Administration

Note: Not adjusted for inflation.

The price people end up paying for gasoline is the result of the trading that takes place in a sprawling international market for petroleum and petroleum products. But like many other facets of the global economy, it comes down to supply and demand – and when the balance between these two forces is disturbed, costs inevitably swing.

Expensive oil becomes expensive gas.

The United States is the world’s largest producer of petroleum and processed petroleum products. In recent years it has become a major exporter, shipping large quantities to Latin America and Europe.

But the United States also buys a lot of oil from other countries. It is the world’s second largest importer after China. This is partly because US refineries are often designed to process different types of oil than those produced in the United States.

It would be costly and difficult to reconfigure refineries to process more US oil, which is why the US will likely continue to import large quantities even if it produces more domestically. The United States also uses far more oil than it produces.

Russia, by comparison, is the world’s second-largest producer and accounts for about one in 10 barrels in the global market. Before the country invaded Ukraine in February, about half of Russia’s oil exports went to Europe, amounting to $10 billion in transactions per month. Last year, about 8% of US crude oil imports came from Russia.

The United States is a major oil producer – and a major oil importer

Monthly crude oil produced in the United States

Monthly crude oil imported by the United States

Source: Energy Information AdministrationNote: production data is up to May 2022, import data is up to March 2022.

Since the start of the war in Ukraine, Russia has been selling less oil, in part because of sanctions imposed by the European Union, the United States and other major economies. This reduced global supply and caused prices to spike.

To help alleviate this growing crisis, President Biden is asking US oil companies and other major oil producers to increase production, but it hasn’t had much success. That’s because oil executives fear the price will go down if they increase production too much. And countries like Saudi Arabia and the United Arab Emirates cannot rapidly increase production enough to compensate for the expected drop in Russian supplies.

The effort to stabilize the oil market, however, is in contradiction with Mr. Biden’s stated ambition to switch the country to electric cars and renewable energies.

Why the No. 1 oil country produces less oil.

Even before the invasion, oil and gasoline prices were rising as the world gradually recovered from the Covid pandemic. For a brief moment in 2020, the cost of a barrel of oil fell below zero as storage tanks were full due to lack of demand. Now commuters and vacationers are back on the road, and offices and industries have reopened.

Prices have increased since the pandemic.

Daily oil price since the beginning of 2020

–$50

$0

$50

$100 per barrel

2020

2021

2022

June 6

$118.41
per barrel

Demand fell sharply during the pandemic shutdowns, briefly pushing the price of oil below zero.

The war in Ukraine has disrupted the supply of Russian oil, causing prices to soar.

Source: Energy Information Administration

Note: West Texas Intermediate oil price. Prices are not adjusted for inflation.

Oil companies have been slow to respond to the rebound after laying off workers and decommissioning rigs during the pandemic crisis.

There have been two oil crashes in the past eight years, and many leaders believe another is inevitable. That made them hesitant to drill new wells and seriously ramp up production, said Christopher Knittel, an energy economist at the Massachusetts Institute of Technology. Lack of investment has led to a decline in production in recent years.

Companies have instead directed their profits to shareholders in the form of dividends or share buybacks.

“Even if they see high prices today, they’re worried that prices will drop over the life of this well,” Knittel said of the industry executives. “They also expect electric vehicles to continue to grow, which means that in 10 years this oil well may not be making a profit. And so all of that creates a disincentive for drilling.

At the same time, refineries are regularly closing for similar reasons as oil companies prepare for a transition to renewable energy, said John Auers, vice president of energy consultancy Turner and Mason.

The slowdown in domestic activity comes as global refining capacity barely meets market demand. Combined, these conditions can amplify global supply disruptions.

As the war in Ukraine drags on and Russian production plummets, analysts have suggested the energy market could be fundamentally rewired. Over time, this change in the flow of oil could reduce Russia’s influence over Europe. But until supply increases or demand drops, prices at the pump will likely remain high.

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