Will Gas Hit $10? Consumer gas prices in the United States exceeded an average of $5.00 per gallon for the first time in June this year.
In fact, if you went to one Chevron Station in Mendocino, California, you’d find the most expensive fuel in the country, where a regular gallon of unleaded was selling for $9.46.
Indeed, the phenomenon’s not just confined to the American market either. Prices are rising everywhere, with a gallon of petrol in the UK coming in around $9.00 at the pumps, while drivers in Hong Kong seem to be having the worst of it, with costs of up to $11.00 for a similar eight-pint ration.
Of course, you don’t have to drive a car to know that gas prices are skyrocketing: just glance at any news feed, and you will be bombarded by stories of rising energy costs, many linking the problem with the outbreak of war in Ukraine.
And they wouldn’t be wrong – Russian aggression in the east of Europe has precipitated severe fuel shortages all across the globe.
However, these shortages are mainly due to sanctions imposed by Western governments and their allies, rather than just disruptions to the supply chain that warfare necessarily inflicts.
That said, many other root causes are contributing to rising gas prices right now. In this article, we’ll examine some of them in more detail, and figure out whether costs are likely to spiral out of control – or, conversely, if the price of fuel is about to come crashing down.
Supply And Demand
The underlying motive informing rising gas prices is tied in with the soaring cost of crude oil. A barrel of West Texas Intermediate was trading for over $130 in the months following the invasion of Ukraine, and it’s still elevated today at north of $100.
Much of this price spike is being driven by supply and demand. Simply put, the world is starting to get back to normal after a period of almost total inactivity due to Covid-related lock-downs, while at the same time, the resources that are fueling this recovery have been severely curtailed.
Indeed, the oil inventories of most developed nations are currently at multi-year lows, with just 2.6 billion barrels of oil falling short of their five-year average of 2.9 billion. Furthermore, gas inventories have also dropped, sinking from 246 million barrels in February to 219 million barrels in June.
Moreover, the hydrocarbon industry is doing its best to alleviate the situation, operating at total capacity and pumping out as much petroleum product as possible.
But it isn’t enough. Demand keeps rising, and, with Russia’s contribution to global fossil fuel supplies diminished, prices just continue to rise.
Source: Unsplash
Refineries Are The Bottleneck
Another factor that’s causing the steep rise in gasoline costs today is the inefficient way that crude oil is processed.
Where some companies are primarily involved in finding and extracting the raw material from out the ground, it falls on refineries to turn that substance into something that consumers can ultimately use.
The problem, however, is that refineries serve their local markets, meaning that the actual price that drivers pay for gasoline is heavily dependent on where they live – and at what gas station they happen to frequent.
In fact, in normal times, gas prices usually mimic the same pattern as that of crude oil, but that isn’t what’s necessarily happening just now. For instance, a power outage in March caused a refinery to close in California, leading to increased gasoline prices throughout the affected region.
In addition, it’s also known that inventories decline during the spring and summer months, as road traffic increases and more people start hitting the roads again.
All of this is a boon for refineries. Indeed, their profitability is going through the roof at the moment, as the “crack spread” for their products goes up.
For example, spreads have practically doubled this year, rising to almost $50 for every barrel processed. HF Sinclair, a Dallas-headquartered refinery, made so much money in the first quarter, that it decided to reinstate – and increase – its previous dividend payout.
Which Companies Are Likely To Benefit From Higher Gas Prices?
Some of the biggest winners from rising gasoline prices are obviously the refineries themselves. Not only are individual businesses enjoying excellent crack spreads, but the US government’s threat to cap oil exports is spurring foreign purchases, further increasing their overall profits.
Shale oil producers are also well-positioned to reap the rewards of soaring gas prices too. This type of fossil fuel extraction has a relatively quick turnaround, which means that companies can get the product from field to refinery in a pretty rapid fashion.
This is especially important because most other drilling operations can’t ramp up production in response to favorable hydrocarbon prices. It also means that investors don’t have to take a long-term bet on the entire oil industry, and simply look to make quick gains from a short-term stake in a solid fracking outfit.
Could Gas Prices Return To Normal?
One of the biggest problems for gas companies is that they’re finding it difficult to hedge against wild swings in market volatility. In some places, wholesale diesel prices can rise 75 cents in a matter of days, making gasoline retailers reluctant to lower their own charges when costs do eventually level out.
But if Biden’s plan to limit exports of oil does eventually come to fruition, that could certainly dampen down the price of gas in the near term at least.
There are, of course, other catalysts that could also see the market in fossil fuels deflate.
The shift toward renewable energy appears to be something that policy-makers currently crave, regardless of whether it is actually feasible long-term.
Moreover, electric vehicles seem to be in vogue at the moment too, although that again could just be a passing fad.
With no end in sight for the war in Ukraine – and uncertainty as to how much OPEC will raise its output for the rest of the year – it’s a safe bet that the price of gas is going to keep on expanding for some time yet.
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