Why are Gasoline Prices Still Going Up… and When Will They Come Down?

As all of us who drive and/or absorb news know, gasoline prices are painfully high and seem to be getting higher by the hour.  Why is that and when will it end? 

First of all, we are right, we are paying more, well let’s just call it what it is, a lot more for gasoline right now. Today, the national average for regular unleaded gas is about $4.60, up 40% from $3.28 at the start of 2022 and 51% higher than the $3.04 national average a year ago.  Clearly, there are a number of reasons for the increase, which means the “why” question is hard to answer.  But what is clear is that no one person, company, or government controls gas prices, which also means no one person, company, or government can fix this mess.  

Reason 1:  Covid caused serious pain for global oil in 2020 and this large and slow-moving market has just not yet recovered.  As you may remember (or you can go back and read Bernie’s Blog) oil prices dropped precipitously seemingly overnight, as millions of people around the world sheltered in their homes whenever they could.  There was a time in April 2020 when benchmark world oil prices were actually negative.  Physical oil reserves filled rapidly, and energy producers/OPEC nations drastically cut production due to the really low prices.  So now if we fast forward to 2022, oil demand is almost to pre-pandemic levels, but the supply has not been built back up yet – a slow process.  Not to mention that much of the least cost-effective production was permanently shut down over the last two years.   Oil companies are just not anxious to dig new wells because oil pricing is so volatile.  And let’s be honest, the oil companies and their investors are pretty happy with status quo.  Just take a quick look at your energy holdings….. the only holdings we are actually encouraging you to look at!

Reason 2:  Besides the financial disincentive to dig new wells, there is growing support around the world to replace fossil fuels with more carbon neutral alternatives.  This support and public debate have made future oil drilling even more challenging, especially in a mid-term election year. 

Reason 3:  The war in Ukraine has resulted in sanctions against and voluntary import stops of Russian oil.  Prior to February, Russia supplied 10% of the world’s oil, albeit a much larger percentage in Europe than in the U.S.  The reliance on Russian oil can be reduced but it takes time and money to do – with financial pain for all. 

So now the question we all have… when do gas prices come down for real?  It doesn’t feel like the three factors above, which largely impact oil supply, are going to improve markedly anytime soon, which means a demand change will be required.  That demand change is most likely to come about with higher interest rates and slower economic growth, which come with their own set of challenges, as we all know.  Not an easy problem to solve.  We can add it to the list of hard problems to solve.