The Plain Truth About Gasoline Prices
Last week I averaged more than an interview per day on radio or TV. The topic was the same in each case: What’s behind the surge in gasoline prices, and when might we expect some relief?
There is tremendous interest in this topic right now. Since it has been a while since I have covered this topic in detail, I thought it would make a good subject for this week’s article.
Over the past 18 months, the price of West Texas Intermediate (WTI) has approximately tripled. That fact is responsible for essentially all of the subsequent rise in gasoline prices. But why did that happen?
The COVID Effect
In early 2020, just before the COVID-19 pandemic, U.S. oil production hit an all-time high of about 13 million barrels per day (BPD). As the pandemic unfolded, demand for oil collapsed, and production followed. By May 2020, oil production had dropped by more than 3 million BPD to 9.7 million BPD.
When the pandemic crushed oil demand in 2020, some oil companies went out of business. Some small stripper wells, which account for a respectable amount of U.S. oil production, were permanently capped because of the bleak outlook. Some workers left the oil industry. As people went back to work, demand began to bounce back, but production lagged due to the aforementioned issues.
Following the production collapse of 2020, the U.S. has been playing catch up as demand recovered. Oil prices began to rise in response to insufficient supplies.
Many people are unaware that the price rise began before President Biden assumed office. But in the last three months of President Trump’s term, the price of WTI rose by 32%. In Biden’s first three months, prices rose by 19%. In the three months after that, another 17%. It was neither primarily President Trump nor President Biden’s fault, and these price surges were taking place all over the world.
However, President Biden was fully blamed by many because of his early decisions that were hostile to the oil and gas industry. Those decisions, such as cancellation of the Keystone XL pipeline, may impact oil and gasoline prices in the future. But those are long-term impacts, not short-term. These decisions had little to no impact on the gasoline price surge over the past 18 months. Again, these price surges were happening everywhere, for the same fundamental reason: The COVID-19 pandemic disrupted supply, and it was slow to return.
In reality, a President has few handles for impacting gasoline prices in the short term. Those handles are primarily 1). Releases of oil from the Strategic Petroleum Reserve; 2). Changing the gasoline tax; or 3). Involvement in a war with a major oil producer. All of these things can have a rapid impact on gasoline prices. Other things, such as cancelling pipelines and moratoriums on drilling, are longer term impacts that will play out over years.
The Putin Effect
During the second half of President Biden’s first year, oil prices finally settled down in a range of $70-$80/bbl. But in January 2020, Russia began to make aggressive overtures toward Ukraine. Russia is one of the three largest oil producers in the world (the others being the U.S. and Saudi Arabia), and the markets began to get nervous about the potential impact to Russia’s oil supplies.
In January 2022, oil prices broke out of the previous range and averaged $83.22/bbl. In February, when Russia actually invaded Ukraine, the average price jumped to $91.64/bbl. I attribute this price rise primarily to Vladimir Putin, combined with the world’s response to the invasion.
Then, President Biden’s decision last week to stop importing Russian oil was the trigger for oil prices surging above $120/bbl. They have retreated from that level for now, but the inefficiencies involved in rerouting Russian imports and backfilling that oil will keep a premium on prices.
I am not making any judgments here on whether it was the right or wrong decision. I am simply pointing out that the decision has added another premium on the price of oil, and in turn gasoline.
When Will It End?
Perhaps more importantly than the reasons it happened, most people want to know how long gasoline prices will remain elevated. Recall that the last time oil prices spiked this high was in 2008, and that contributed to a recession that ultimately crashed the price.
This time, a lot depends on Russia. If Russia retreated from Ukraine, we would probably see oil prices quickly fall back below $100/bbl. That would likely translate into relief at the pump of $0.25-$0.50/gallon.
Should Russia become bogged down and remain in Ukraine, relief will only come as U.S. producers and OPEC producers continue to ramp up production. That’s likely to take another 6-12 months before any significant relief is seen.
Bear in mind that we are also headed into summer driving season, when demand for gasoline is greatest. That demand doesn’t start to decline until September, so barring an early withdrawal of Russia from Ukraine, we are probably looking at September as the earliest month in which we may see significant relief in gasoline prices.
Editor’s Note: Energy expert Robert Rapier just provided you with insights into the crucial metric of gasoline prices. You should consider the investment advice of our colleague Jim Fink.
Jim Fink is chief investment strategist of the elite trading services Options For Income, Velocity Trader, and Jim Fink’s Inner Circle. He has agreed to show 150 smart investors how his “paragon” trading system could help them earn 1,000% gains in just 12 months.
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