People in the United States are paying record prices for gas because Russia has taken over Ukraine. But that isn’t the only reason. Many things are working together to push gas prices to a record high. On Wednesday, AAA’s survey said that the price of a gallon of regular gas was $4.25, which is what it costs to fill up.
It didn’t matter if shots were fired or economic sanctions were put on Eastern Europe. Gas prices were already expected to break the $4 a gallon mark for the first time since 2008. Many things are going on at the same time, so drivers should expect to pay a lot of money for gas for at least until Labor Day. Even a national average price of $5 a gallon is not out of the question.
Here’s what caused the record price rise:
It was Russia that invaded Ukraine.
This means that Russia is one of the world’s top oil exporters. Almost 8 million barrels of oil and other petroleum products were sold around the world in December. Almost 5 million of those barrels were crude oil.
It didn’t go to the United States. 60% of the oil went to Europe in 2021. Only 20% went to China. But oil is sold on global commodity markets, so the loss of Russian oil affects oil prices around the world, no matter where it is used. This is because oil is sold on global commodity markets.
Gas prices across the US
In the beginning, western countries didn’t include Russian oil and natural gas in the sanctions they put in place to show their displeasure with the invasion.
Despite that, a lot of Russia’s oil isn’t getting sold on the global market. In light of the sanctions against Russia’s banks and the uncertainty about whether any deal can be done, traders are not willing to bid for this item. Some tankers have also not been able or willing to come to Russian ports because they can’t find any.
This has led to a “de facto ban” on Russian oil in global markets, with investors pricing crude as if the country doesn’t have any.
On Tuesday, it was announced that the United States will ban all Russian energy imports for good. Also, the UK government said it will stop buying oil from Russia by the end of 2022 and look into ways to stop buying gas from them.
The rest of Europe is getting more and more pressure from the rest of the world to join a formal ban on Russian oil. Russia is the source of about 27% of the 27-nation European Union’s oil.
Despite the US and UK moves, a European ban could make oil prices rise even more because there are fears that the ban will stay in place even when the fighting in Ukraine ends. A lot of the time, people trade oil futures based on how much they’ll get.
Rising gas prices
The price of a barrel of Brent crude used in Europe was $123.21 on Monday, up 27% since the start of the fighting 12 days ago. It closed at $119.40 a barrel on Monday, up 30% from the same time last year. West Texas Intermediate oil is the US benchmark.
Less oil and gas from other places
Pandemic-related stay-at-home orders worldwide in the spring of 2020 caused oil prices to fall so much that they briefly lost value. OPEC and its allies, including Russia, agreed to cut back on production as a way to keep the price of oil high. Even though demand came back sooner than expected, they kept their production targets low.
Companies in the United States don’t have to meet certain production goals set by the government. But they haven’t been able or willing to get back to making oil at the levels they used to make before the pandemic because they’re worried about stricter environmental rules that could cut demand in the future. There were a lot of tougher rules that didn’t become law.
As president of Rapidan Energy Group, Robert McNally said: “The Biden administration is now more interested in more drilling, not less drilling.” A lot of people are worried about high oil prices more than anything else.
Even when oil companies face the same supply chain and hiring problems as many other businesses in the United States, it takes time to increase production and make more money.
“They can’t find people, and they can’t find the right tools.” “It’s not like they charge a lot for them. They can’t be bought.”
Over the last two years, oil stocks have been lagging behind the rest of the stock market. At least until recently, when oil prices rose so much that the stocks were not close. Instead of increasing production, oil company executives wanted to use the money they had to buy back stock and do other things that would help their share price, rather than increasing production.
There aren’t many oil and gas companies that want to drill more, says Pavel Molchanov, an analyst at Raymond James. “When they were 10 years old, they would have done things like “drill baby drill,” which is what the financial world wants them to do now instead of what they would have done 10 years ago. The company’s strategy has changed in a major way.”
Oil production isn’t as high as it was before the pandemic. There is also less refining capacity in the United States. Today, there aren’t as many barrels of oil that can be turned into gasoline, diesel, jet fuel, and other petroleum-based goods.
Some refineries are switching from oil to renewable fuels with a lower carbon footprint. This is because of state and federal rules. As a result, some companies are closing older refineries rather than investing the money it would take to retool them to keep them running. This is because huge new refineries are set to open in Asia, the Middle East, and Africa in 2023.
After two refineries were damaged by hurricanes last year and another exploded, many major refineries in the United States haven’t been able to get back to work.
A lot of people want gasoline
There have been record job gains in 2021 and the strongest economic growth since 1984, which have led to a rebound in driving. The first year of the pandemic also caused a lot of people to want to go on vacation.
So far this year, job gains have been strong. In addition, many people who have been working from home for the last two years are now going back to the office. This is giving demand another boost.
There have been a lot of jobs, and many people will be driving to work. Tom Kloza, the global head of energy analysis for the Oil Price Information Service, said that. “There will also be more people who don’t work from home than there were last year or even last month. To be honest, I can’t figure out how many more people will want this.”
Many restrictions on Covid have been lifted, encouraging people to leave the house more often for shopping, entertainment, and safe and fun travel. Inrix, a mobility research firm, says that trips in passenger vehicles in the United States have risen 25% since the start of this year.
Commuters may not be able to get to work as often as they used to because of the pandemic. Many people who plan to go back to work will only be there three or four days a week, not five. The total number of jobs is still a little below what they were in 2019.
Even so, Kloza says there will be times when there will be more demand for gas than there was before the pandemic. Most likely this summer.
Prices were likely to rise above $4 even if the war didn’t happen right now. Tight supplies and strong demand were likely to push the price up.
Before Ukraine, Kloza said, “I thought I would break the record.” It’s now about how much we break the record by.