Russia’s invasion of Ukraine is one of the main reasons American drivers are paying record high prices for gasoline. But this is not the only cause of the spike. (David Paul Morris, Bloomberg/Getty Images)
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ATLANTA — Russia’s invasion of Ukraine is a major reason American drivers are paying record high prices for gasoline. But this is not the only cause of the spike.
Many factors are pushing prices higher, with regular gasoline hitting a record high of $4.67 a gallon on Wednesday according to the AAA survey.
Gas prices were already expected to cross 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.
Indeed, there are a number of reasons other than the disruption of Russian oil exports that are driving up prices, according to Tom Kloza, global head of energy analysis for OPIS, which tracks gas prices for AAA. And making predictions about price action has proven difficult. Wednesday’s record is already higher than what Kloza expected a few weeks ago. As school ends and summer travel resumes, the demand and price for gasoline will also rise, he said.
“Everything goes from June 20 to Labor Day,” Kloza said.
Here’s what’s behind the record price spike:
The Russian invasion of Ukraine
Russia is one of the world’s largest oil exporters. In December, it sent nearly 8 million barrels of petroleum and other petroleum products to world markets, 5 million of them in the form of 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 the price of oil is set in global commodity markets, so the loss of Russian oil affects prices around the world, regardless of where it is used.
Concerns about disruption in global markets led Western countries to initially exempt Russian oil and natural gas from sanctions they had put in place to protest the invasion.
But in March, the United States announced a formal ban on all Russian energy imports. And on Monday, the EU announced a ban on Russian oil imports by ship, which accounted for about two-thirds of European countries’ oil imported from Russia. Russian oil is slowly and steadily being withdrawn from world markets.
End of lockdowns in China
Rising COVID-19 cases and strict lockdown rules across much of the country have been a factor that has kept oil prices in check somewhat. This was a major drag on oil demand.
People are more concerned about high oil prices than anything else.
–Robert McNally, President of Rapidan Energy
But as the COVID surge has started to recede, lockdowns are being lifted in major cities like Shanghai. And more demand without an increase in supply can only push prices up.
Less oil and gas from other sources
Oil prices plunged as 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 drastically cut production to support prices. And even when demand returned earlier than expected, they kept production targets low.
US oil companies do not adhere to these types of nationally mandated production targets. But they have been unwilling or unable to resume oil production to pre-pandemic levels, fearing tougher environmental rules will reduce future demand. Many of these stricter rules have been scaled back or have not become law.
“The Biden administration is suddenly interested in more drilling, not less,” Robert McNally, president of consulting firm Rapidan Energy, said earlier this spring. “People are more concerned about high oil prices than anything else.”
It takes time to ramp up production, especially when oil companies face the same supply chain and hiring challenges as thousands of other American companies.
“They can’t find people and can’t find equipment,” McNally added. “It’s not like they’re available at a high price. They’re just not available.”
Oil stocks have generally lagged the market over the past two years, at least until the recent price spike. Oil company executives would rather find ways to raise their stock prices than increase production.
“Oil and gas companies don’t want to drill more,” Raymond James analyst Pavel Molchanov said earlier this spring. “They’re under pressure from the financial community to pay more dividends, to do more share buybacks, instead of the proverbial ‘drill baby drill’, like they would have done 10 years ago. years. The corporate strategy has fundamentally changed.”
One of the starkest examples: ExxonMobil reported first-quarter earnings of $8.8 billion last month, more than triple the level a year ago excluding special items. He also announced a $30 billion share buyback plan, far more than the $21-24 billion he plans to spend on all capital investments, including finding new oil.
Not only is oil production lagging behind pre-pandemic levels, but U.S. refining capacity is down. Today, about 1 million fewer barrels of oil per day are available for processing into gasoline, diesel, jet fuel and other petroleum-based products.
State and federal environmental rules are prompting some refineries to switch from petroleum to low-carbon renewable fuels. Some companies are closing older refineries rather than investing what it would cost to re-equip them to keep them running, especially with massive new refineries opening overseas in Asia, the Middle East and in Africa in 2023.
And the fact that diesel and jet fuel prices are rising much more than gasoline prices shows that refiners are shifting more of their production to these products.
“The economy forces you to make more jet fuel and diesel fuel at the expense of gasoline,” Kloza said.
High demand for gas
But supply is only part of the pricing equation. Demand is the other key, and while it’s very strong right now, it still hasn’t returned to pre-pandemic levels.
The U.S. economy saw record job growth in 2021, and while those gains have slowed, they remain historically strong. Demand is boosted again as the many employees who have worked from home for much of the past two years return to the office.
The start of the summer travel season on Memorial Day weekend is expected to trigger the typical annual increases in demand for gasoline and jet fuel. U.S. airlines are all reporting very strong bookings for summer travel, even with airfares surging 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. In the United States, travel by passenger vehicle has increased by 10% since the start of this year, according to mobility research firm Inrix.
Home-to-work travel may remain slightly down. Many of those 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 there will be periods, most likely this summer, with higher gas demand than during comparable periods before the pandemic, predicts Kloza.
“Even before Ukraine, I expected to break the record,” Kloza said. “Now it’s about how much we break the record.”