Why is fuel so expensive? It’s not just the price of oil

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When energy prices soar, there are few places where the pain is felt as acutely as at the gas station. The cost of gasoline for your car or diesel fueling trucks is determined by a complex mix of politics in the Middle East, refining capacity, government policy and, at times, war. Although Russia’s invasion of Ukraine was the trigger that propelled fuel prices to new highs in 2022, it was not the only cause.

1. Has filling my tank ever cost this much?

Probably not, at least in nominal terms. Prices nationwide in the United States briefly topped $5 a gallon to hit a record high in June. In some places, they topped $6, according to data from the American Automobile Association. Prices have also hit record highs in the UK, where filling an average car costs more than 15% of a week’s earnings in some areas. For emerging economies in particular, there has been a double whammy, with the rising dollar compounding the already severe impact of rising oil prices.

After war broke out in Ukraine in late February and the United States and its allies announced plans to embargo Russian energy exports, prices of crude oil that fuels refineries jumped above $100 a day. barrel. Global oil production was already recovering only slowly from the Covid-related disruptions, with some major producers struggling to increase supply and the United States pumping far less than before the pandemic. This made it more difficult to quickly replace Russian oil, leading to supply tensions that inflated fuel prices.

3. Is this the only reason?

No. The biggest problem was the lack of spare processing capacity to turn available crude oil into consumable fuels. Officials from Saudi Arabia to the United States blamed the price spike on a lack of refining infrastructure. Prices rose faster than crude oil and continued to gain even as crude fell in June.

4. Are there historical precedents?

As the 2008 global financial crisis approached, refiners were unable to meet demand, leading to what industry analyst Doug Terreson described as a “golden age”. refining”. Gasoline jumped to a record high above $4 a gallon before plunging to $1.62 as the crisis hit economies. Things look a little different this time around. The post-pandemic recovery has boosted energy demand while the war in Ukraine is restricting supply. This, combined with the fastest rate of inflation in decades, means there is more debate about whether fuel prices will remain high in the event of another recession.

5. Can’t we just produce more fuel?

Whole swaths of refining capacity have been shut down during the pandemic and it is not easy to bring them back online. The United States lost more than a million barrels per day of capacity between 2019 and 2022, and the remaining plants were already operating near flat. Some facilities will never restart, even with near-record profit margins. The large, multi-year investments needed for such facilities have become harder to come by as everyone from policymakers to consumers and financiers consider greener alternatives.

Several giant new refineries – long in the planning and construction – are expected to come online in the coming years, but the effect will not be dramatic. New plants in the Middle East, China and Africa won’t be enough to balance the aviation and diesel fuel markets in 2022 or 2023, according to the International Energy Agency.

7. What can governments do?

Some have cut taxes or introduced fuel rebates and subsidies to ease the pain of beleaguered consumers. According to Bloomberg Economics estimates, the Mexican government was paying far more in gasoline and diesel subsidies than it was earning in higher prices on its crude exports. In June, US President Joe Biden called for a pause in gasoline tax collection. Economics dictates that if supply cannot be increased, high prices will eventually depress demand, eventually causing prices to fall. Reducing fuel taxes may be popular, but it could increase demand and therefore help keep prices high.

More stories like this are available at bloomberg.com

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