Russia's invasion of Ukraine initiated the skyrocketing gas prices. The systematic issues at that point exaggerated the problem.
Now the problem is that 'prices are sticky'. Once an industry sees a market that's willing to pay more than before, they are loath to reduce to previously lower prices.
U.S. gasoline prices have reached records above $4 a gallon, threatening to hamper economic growth, lift already high inflation and cut down on summer road trips.
The reopening economy already had lifted prices from pandemic lows, but the rise turned into a surge after Russia’s invasion of Ukraine. Here are the factors driving up prices.
Why are gas prices so high?
Oil prices, already turbocharged by a rebounding economy after a pandemic-induced slowdown, were pushed even higher when Russia’s invasion of Ukraine pulled some three million barrels of Russian oil a day from global supplies.
“Putin’s invasion of Ukraine has driven up gas prices and food prices all over the world,” President Biden said in an April 1 address.
Prices have stabilized somewhat recently, though oil remains near $100 a barrel, a level that is likely to worsen inflation and curb consumer spending. Mr. Biden, hoping to tamp down petroleum prices, plans to tap up to 180 million barrels of strategic oil reserves, an unprecedented move the administration hopes will provide temporary relief as U.S. producers move to increase domestic supplies. Other Western nations and their allies have also agreed to release oil from their reserves.
Gasoline prices have hit records as petroleum refiners that had cut back output as the economy slowed still haven’t ramped back up to pre-pandemic levels. The market has lost about one million barrels of daily petroleum-refining capacity since early 2020, when the U.S. was producing about 19 million barrels of refined petroleum a day.
Events in Ukraine caused oil prices to skyrocket, pouring gasoline on what was already a smoldering fire. Brent crude topped $130 a barrel in early March, and gasoline prices recently hit a record $4.331 a gallon, putting them up more than 15% from where they stood a month earlier, according to AAA. Prices have fallen slightly from that record, hitting $4.215 a gallon on Friday, despite the continuing loss of Russian oil.
Speculators betting prices will rise could also drive oil higher.
Roughly 8% of U.S. imports of crude oil and refined products came from Russia last year.
PHOTO: YEGOR ALEYEV/ZUMA PRESS
How has Russia’s invasion of Ukraine affected the price of gas?
It caused an almost instantaneous global supply shock. Russia is one of the biggest oil producers in the world. As its attacks in Ukraine intensified, traders, shippers and financiers shunned Russian oil, removing much of it from the daily global supply.
Western governments have said they are contemplating adding Russia’s oil-and-gas supplies to a lengthening list of sanctions. Oil prices shot up again after the U.S. unveiled a ban on Russian imports of crude oil, certain petroleum products, liquefied natural gas and coal.
Roughly 8% of U.S. imports of crude oil and refined products came from Russia last year.
Biden: U.S. to Tap Oil Reserves to Control Fuel Prices
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President Biden said in late March that he plans to release as much as 180 million barrels of oil from the U.S. Strategic Petroleum Reserve over the next six months to help tamp down near-record high fuel prices. Photo: Patrick Semansky/Associated Press
Are any actions being taken to lower gas prices?
President Biden has said his administration would release millions of barrels of oil from the U.S. Strategic Petroleum Reserve, which has a capacity of 727 million barrels. However, experts say that is unlikely to move the needle very much on the price of gasoline.
Some state and federal officials are also weighing state and federal gas-tax decreases to ease consumers’ pain at the pump. Business groups are pushing back on such moves, saying they could jeopardize infrastructure improvements.
The Biden administration also has held talks, or said it plans to do so, with major oil producing countries about potentially boosting production. Talks with Venezuela, the oil industry of which the U.S. sanctioned in 2019, met opposition from Republicans, as well as some Democrats.
Republican lawmakers have called on Mr. Biden to expand domestic oil and natural-gas production in response to high prices. So far, the White House has rejected those entreaties, countering that the oil industry should drill on the unused federal leases companies already have.
Most oil and gas development in the U.S. occurs on private and state land. The Interior Department said that as of the end of last year, the oil-and-gas industry held more than 9,000 approved federal permits to drill onshore that hadn’t been used. Not all of those permits will produce oil, analysts said.
American shale drillers have said there are limits to how much and how quickly they can boost shaky oil supplies due to supply-chain issues, investors wary of overspending, thinning inventories and other problems that constrict growth.
Do political policies and agendas play a role in gas prices?
Yes, though those effects are typically long-term. Oil prices are set on global markets and are largely a factor of supply and demand. However, some governments advocate policies that can impact both.
U.S. inflation rose to a 7.9% annual rate in February, according to Labor Department data. Gasoline prices, meanwhile, were up a seasonally adjusted 6.6% from the previous month, representing an unadjusted annual increase of 38%.
Rising gas prices—and commodity prices generally—are making a difficult job even harder for Federal Reserve officials, who are aiming to slow already hot inflation without hurting the economic recovery. A key question now facing investors and Fed officials is whether rising energy prices will add to or subtract from inflation in the medium term.
Crude oil storage tanks in Cushing, Okla. President Biden has said his administration would release millions of barrels from the U.S. Strategic Petroleum Reserve.
PHOTO: NICK OXFORD/REUTERS
On one hand, higher gasoline prices could spur consumers to cut back on spending, resulting in lower “core inflation,” which excludes volatile food and energy items and is what Fed officials tend to care about most. But higher gas prices could also drive consumers to demand better pay, potentially pushing up core as well as “headline” inflation.
Between 2000 and 2019, core inflation tended to decline when energy prices accelerated, analysts at Jefferies LLC wrote in a March report. Over the past two years, however, energy and core inflation have climbed together, “hinting that this time might be different,” they wrote.
In contrast to the pre-pandemic economy, many households now are flush with cash, making it easier to absorb higher gas prices. In addition, the labor market is tight, giving workers more bargaining power.
How much oil does the U.S. use?
The U.S. consumed 18.2 million barrels of petroleum a day in 2020—for uses including fueling vehicles, producing electricity and heating—for a total of 6.7 billion barrels for the whole year, according to the Energy Information Administration.
However, those figures are skewed because of the pandemic-induced economic slowdown that led to the lowest level of annual consumption since 1995. In 2019, more than 20 million barrels of petroleum were consumed a day in the U.S., according to the EIA.
California’s strict environmental rules have helped push gasoline prices there to the highest in the U.S.
PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS
Why are gas prices in California so high?
The average price of gasoline in California is $5.882 a gallon, the highest in the country and well above the national average, according to AAA. Nevada and Hawaii were also above $5 a gallon.
There are a few reasons for the disparity. The state has strict environmental rules guiding gasoline blends designed to reduce smog that can make Golden State gas pricier. Relatively few sources provide the distinctive blend of gasoline required by the state, driving up the price, according to the EIA. Additionally, state taxes on gasoline in California are higher than in most other states.
Similar reasons can affect gas prices in other areas. State and local taxes can raise prices at the pump. Distance from gasoline supplies and disruptions in services, such as breakdowns at refineries, also can affect prices. Competition is another factor: Places with fewer gas stations tend to have higher prices.
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