Why US gas prices are at an all-time high and why they will stay high for a long time

Many factors are conspiring to push gasoline prices to an all-time high. Gas hit $4.25 for a gallon of regular gasoline, according to the AAA survey on Wednesday.

Gas prices were already expected to cross the $4-a-gallon mark for the first time since 2008, with or without gunshots or economic sanctions imposed in Eastern Europe.

Now, because so many factors are in play simultaneously, drivers should be prepared to pay uncomfortably high gas prices at least until Labor Day. Prices could easily hit $4.50 a gallon before they start to pull back, and even a national average of $5 a gallon isn’t out of the question.

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. Europe got 60% of the oil and 20% went to China in 2021. But the price of oil is set in global commodity markets, so the loss of Russian oil affects oil prices in the world. worldwide, wherever 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.
Despite this exclusion, much of Russian oil remains unsold on world markets. Traders are reluctant to bid when it is not clear that a deal can be struck, given the sanctions imposed on the Russian banking system. It has also been difficult to find tankers able or willing to call at Russian ports.

This has resulted in a de facto ban on Russian oil from world markets, with investors pricing crude as if the country’s supply is unavailable.

On Tuesday, the United States announced a formal ban on all Russian energy imports. The UK government has also said it will phase out Russian oil imports by the end of 2022 and explore ways to end natural gas imports.
There is growing political pressure on the rest of Europe to join a formal ban on Russian oil. Russia supplies around 27% of the oil imports of the 27 EU countries.

While oil prices have edged higher on moves from the US and UK, a European ban could push global prices even higher amid fears the restriction could stay in place indefinitely, even once oil prices are released. fighting in Ukraine will have ceased. Oil is usually traded in the form of delivery-indexed futures contracts.

The price of Brent crude, the closely watched benchmark used in Europe, closed on Monday at $123.21, up 27% since fighting began just 12 days ago. West Texas Intermediary oil, the US benchmark, closed at $119.40 a barrel on Monday, up 30% over the same period.

Less oil and gasoline from other sources

When pandemic-related stay-at-home orders around the world crushed oil demand in the spring of 2020, oil plunged, briefly trading at negative prices. OPEC and its allies, including Russia, have agreed to drastically cut production to support prices. Even when demand returned earlier than expected, they kept production targets low.
US oil companies do not follow these types of nationally mandated production targets. But they have been unwilling or unable to resume oil production to pre-pandemic levels amid concerns over the prospect of tougher environmental rules that could reduce future demand. Many of these stricter rules have been scaled back or have not become law.
Record gasoline prices sound like a slap in the face.  And there's more to come

“The Biden administration is suddenly interested in more drilling, not less,” said Robert McNally, president of consulting firm Rapidan Energy Group. “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 wanted to redirect cash into share buybacks and other ways to help their stock prices rather than boost production.

“Oil and gas companies don’t want to drill anymore,” said Raymond James analyst Pavel Molchanov. “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. The business strategy has fundamentally changed.”

Not only oil production Ibehind pre-pandemic levels, there is also less refining capacity in the United States. Today, about 1 million fewer barrels of oil per day are available to be broken down 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. And some companies are closing older refineries rather than investing the money it would cost to retool to keep them running, especially with massive new refineries opening overseas in Asia, the Middle East and Africa in 2023.

And major US refineries are not yet fully operational after two were damaged by hurricanes last year and another by an explosion.

High demand for gasoline

Record job gains in 2021 and the strongest economic growth since 1984 have combined to fuel the rebound in driving, as has pent-up demand for travel after the first year of the pandemic.
Job gains have remained strong so far in 2022. And as many workers who have worked from home for much of the past two years are returning to the office, demand is rebounding.

“The number of jobs has been quite impressive and a lot of [workers] will drive to work somewhere,” said Tom Kloza, global head of energy analysis for the Oil Price Information Service. “There will also be more people not working remotely than last year or even last month. I don’t know how to quantify this, but it will definitely increase 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 good travel. In the United States, travel by passenger vehicle has increased by 25% since the start of this year, according to mobility research firm Inrix.

There may not be as much travel as before the pandemic. Many of those planning to return to the office will only be there three or four days a week, instead of five. Total employment is still slightly below 2019 levels.

But there will be times, most likely this summer, when gas demand is greater 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 disruptions caused by the war.

“Even before Ukraine, I expected to break the record,” Kloza said. “Now it’s about how much we break the record.”

– CNN’s Gregory Wallace contributed to this report