Russia’s invasion of Ukraine is a major reason that US drivers are paying record prices for gasoline. But it’s not the only cause of the spike.
Numerous factors are pushing prices up, with regular gasoline hitting a record $4.87 a gallon Monday according to AAA’s survey — up 25 cents a gallon in just the last week.
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. But now the national average is expected to hit $5 a gallon within the next two weeks, said Tom Kloza, global head of energy analysis for the OPIS, which tracks gas prices for AAA.
Now, because so many factors are at play simultaneously, drivers should prepare to pay uncomfortably high gas prices through at least Labor Day. Prices could easily reach $4.50 a gallon before they start to retreat, and even a $5 per gallon national average is not out of the question.
Here’s what’s behind the record price surge:
Russia’s invasion of Ukraine
Russia is one of the largest oil exporters on the planet. In December it sent nearly 8 million barrels of oil and other petroleum products to global markets, 5 million of them as 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 oil is priced on global commodity markets, so the loss of Russian oil affects prices around the globe no matter where it is used.
The concerns about disrupting global markets led Western nations to initially exempt Russian oil and natural gas from the sanctions they put in place to protest the invasion.
Despite that carve out, much of Russia’s oil is going unsold on global markets. Traders are reluctant to bid for it when it’s not clear that any deal can be closed, given the sanctions on Russia’s banking system. There have also been difficulties finding any tankers able or willing to call on Russian ports.
This has resulted in a de facto ban on Russian oil in global markets, with investors pricing crude as if the country’s supply isn’t available.
But in March the United States announced a formal ban on all Russian energy imports. And last week the EU announced a ban on imports of Russian oil by ship, which represented about two-thirds of the oil European nations imported from Russia. Russia’s oil is slowly and steadily being removed from global markets.
There is growing political pressure on the rest of Europe to join a formal ban on Russian oil. Russia supplies about 27% of the 27-nation EU’s oil imports.
While oil prices moved somewhat higher on the US and UK moves, a European ban could drive global prices up further due to concerns the restriction will stay in place indefinitely, even once the fighting in Ukraine stops. Oil is generally traded as futures pegged to delivery.
The price of a barrel of Brent crude, the closely watched benchmark used in Europe, closed Monday at $123.21, up 27% since the start of fighting just 12 days ago. West Texas Intermediary oil, the US benchmark,closed at $119.40 a barrel Monday, up 30% over the same timeframe.
Less oil and gas from other sources
Oil prices plunged when 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 slash production as a way to support prices. And even when demand returned sooner than expected, they kept production targets low.
US oil companies don’t adhere to those types of nationally mandated production targets. But they have been reluctant or unable to resume producing oil at pre-pandemic levels amid concerns that tougher environmental rules could cut future demand. Many of those stricter rules have been scaled back or failed to become law.
“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.”
It takes time to scale up production, particularly when oil companies are facing the same supply chain and hiring challenges as thousands of other US businesses.
“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.
And the fact that diesel and jet fuel prices are up far more than gasoline prices shows that refiners are shifting more of their production to those products.
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.
Job gains have remained strong so far in 2022. And as many workers who have been working from home much of the last two years return to the office, demand is getting another boost.
“Jobs numbers have been pretty impressive and a lot of [workers] will be driving to work somewhere,” said Tom Kloza, global head of energy analysis for the Oil Price Information Service. “There’s also going to be more people not working remotely than there were last year or even last month. I don’t know how to put a number on that, but that is certain to add to demand.”
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.
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 a bit 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.
But there will be periods, most likely this summer, where there will be more demand for gas than during comparable periods before the pandemic, Kloza predicts.
Tight supplies and strong demand were likely to push prices above $4 even without the current disruption caused by the war.
“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.”
– CNN’s Gregory Wallace contributed to this report