- First, the good news: despite agonizing volatility, the price of crude oil is expected to trend lower, reversing the record highs we’ve seen so far this year.
- The bad news: It probably won’t be until 2023, and anything could happen by then.
- Don’t blame the gas station owners or the president. They have less control over the situation than one would like to believe. It is a complex global landscape.
You may have felt a slight tingle if you visited a gas station after July 4th. Whatever libations you may have consumed during the fireworks display or the tinnitus that followed is not our concern. It’s gas prices: they’ve fallen for the first week in months. But are they on a downward trend that will bring us back to pre-pandemic levels? The answer is no, not this year.
Republicans blame Joe Biden, Democrats blame Big Oil, Greens would like us to convert to bikes, and in northern Connecticut, Ralph Nader is laughing at everyone. What is happening with record high gasoline prices is simple and yet so complex that no one actor deserves all the blame. Let’s dive into the raw world of gasoline.
A non-political explanation for crude oil prices
In North America, we track oil prices using West Texas Intermediate (WTI), a blend of crude oil sourced primarily from Texas that serves as one of several global benchmarks for oil futures, or contracts that buyers agree to pay oil producers for a barrel of crude oil. at a specified future date. The WTI price you see quoted in the news is what is called a “month ahead,” which refers to the futures contracts that expire closest to the current date. Currently, WTI closely mirrors Brent crude, which makes up the majority of European and global oil futures.
WTI prices for a barrel of crude fell below $100 this week for the first time since May 10, according to the The Wall Street Journal’s price table. Oil began trading above $100 in the week after the start of Russia’s invasion of Ukraine in late February, when investors feared Russia’s lucrative oil reserves would be disrupted. by possible economic sanctions. But oil prices were already rising before the war, in step with the general recovery of the global economy since the 2020 shutdown, when WTI briefly traded negative and barely rose above $40. With demand and economic activity picking up in 2021, WTI reached into the $60s, $70s, and $80s. It spiked again during the first quarter of 2022 and hit lows of $80 and $90 in the weeks and days leading up to the invasion. Crude makes up a huge chunk of every gallon of retail gasoline, nearly 60%, according to the Energy Information Administration.
Retail gasoline prices and crude prices go hand in hand, as everyone has watched since a gallon of regular-grade gasoline dropped to $1.77 in April 2020 and then rose at $2.85 at the end of March 2021, according to EIA records. Average prices topped $3 last July, reflecting the rise in crude, and matched crude’s peak in early March 2022 when prices spiked past $4 and never recovered. Gas hit a record high of $5 on June 13, falling to $4.77 on July 4, according to the EIA. The last time gas was this expensive (when it was $4 in July 2008), crude prices peaked as high as they have this year.
Crude oil has been particularly volatile over the past four months. WTI prices rose above $120 at the start of the Russian invasion and after European sanctions came into effect on June 1st blocking all Russian oil. During the same period, crude fell to around $100 only to rally a few days or weeks later. Final close prices on July 5 and 6 fell below $100, yes, but that has happened at least nine times since the first peak in March. War, record inflation, soaring interest rates, concern over collapsing global demand due to high shipping costs that high oil prices are driving and impacting prices to equally high consumption – it’s been another unpredictable year, to put it lightly.
Last week, the Biden administration floated the idea of a price cap on Russian oil, which accounts for nearly 10% of global supply. The New York Times called him a “a new and unprecedented effort to force Russia to sell its oil to the world at a very cheap price” that could “starve Moscow’s oil-rich war machine of financing and . . . relieve the pressure on energy consumers.” It is too early to know if other countries will accept such a plan.
Meanwhile, its latest forecast, the EIA expects WTI prices to stay around $102 and then drop to $93 in 2023. Futures appear to be in agreement, with contracts expiring through April 2023 trading in the mid 80s, according to Barron’s. . But literally, anything can happen between now and then to change that trajectory.
The additional costs of federal regulations
There is competition for crude. White gasoline and diesel are the main products coming out of US refineries, the same barrel of crude is used to make kerosene, jet fuel, fuel oil, asphalt, solvents and other petroleum products like waxes and lubricants. There is product overlap between the different companies that sell these products, and yet they are all diverse industries with different requirements.
Beyond the huge conglomerates that still have to import foreign oil to meet demand across the country, consider the 9,000 small oil producers in the United States, which operate in very different markets with different regulatory mandates. Now consider how the Environmental Protection Agency regulates smog by requiring at least 14 summer gasoline blends suitable for specific regions (many of which, therefore, must switch to winter blends).
Then there’s the Renewable Fuel Standard Program, which requires more blends of ethanol and biodiesel than the industry can produce. The industry publication Fuel Market News noted that the 2022 targets “have been deliberately set high to facilitate investment in E15 and E85 infrastructure”. These targets have contributed to the high prices of ethanol credits that refiners must purchase to stay in compliance (similar to California’s zero-emissions credits). Ultra-low sulfur diesel is more expensive than the soot-burning diesel of years past, and it’s not getting any cheaper. Producing premium and mid-grade gasoline requires special additives which are also expensive to manufacture – higher octane is not cheap. None of these costs are insignificant and they are all passed on at the pump.
Shock: President can’t order oil industry to lower prices
Over the 4th of July weekend, President Biden tweeted this: “My message to companies that run gas stations and set prices at the pumps is simple: We are in a time of war and global peril. Lower the price you charge at the pump to reflect the cost you pay for the product. And do it now.
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He’s right to some degree, because the margins between the price of Brent crude and the wholesale price of gasoline – the price paid by gas stations before adding their costs, profits and state taxes – reached record levels at service stations. The EIA reports those margins were $1.17 per gallon in May. But even with diesel reaching $6 in many places, are gas stations really ready to destroy America? The Association for Convenience and Fuel Retailing, an industry lobby, reports that individual gas stations — more than half of which are run by independent owners franchised with major brands — typically earn just 10 cents a gallon after all costs and fees. Believe it or not, most gas station owners make more money from in-store sales than from pump sales. We all know how far we’re willing to go even for a five cent price drop.
As we have described, oil companies and gas stations play in a national and global market and cannot control what American independent oil producers do or what Middle Eastern OPEC countries choose. to do. OPEC agreed to increase oil production and President Biden pleaded with Venezuela and Saudi Arabia to increase production, which would not reduce gas prices any more than his cancellation of Canada’s Keystone XL pipeline would. would increase them. As the New York Times reported, Keystone XL was only 8% complete and was a planned extension of an already heavy pipeline. None of these situations would be a game-changer at the pump.
Biden has demanded that oil companies increase production, but they physically cannot. While the shale boom has more than doubled national oil and gas production since 2008, the country’s 125 refineries are operating at or near maximum capacity, as they were before the pandemic. As of January 1, the United States was refining 17.8 million barrels of oil per day – again, for all petroleum products, not just gasoline and diesel – compared to 18.5 million barrels on January 1, 2020 Crude production from U.S. oilfields has been falling since its 2019 peak, but at 11.6 million barrels a day in April, the oil industry is sucking in more dinosaur juice than ever – that’s more than double of the quantity it extracted in 2008.
Biden also said there were 9,000 permits approved for oil producers who he said “could drill right now, yesterday, last week, last year,” except the Poynter Institute says that it is common practice to have thousands of unused permits in any presidency and that it is not economically viable to rush on cleared land. Drilling – a huge investment with huge potential losses – requires many careful measurements. This is in no way a formal notice.
Biden has proposed a federal gasoline tax exemption, but longer relief would be felt if the EPA could relax the renewable fuel standards program and temporarily suspend regional requirements to formulate summer gasoline. Even so, the oil market is beyond what Congress or a president can attempt to influence. Right now we’re just stuck with high prices.
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