Gas prices have been on the rise in recent months, with the national average price for a gallon of regular gas now over $5. This is the highest gas has been since 2008. There are several factors contributing to the spike in gas prices:
Supply and Demand
A key reason gas prices are so high is imbalances between supply and demand. Demand for gas dropped significantly in 2020 due to COVID-19 lockdowns and reduced travel. As a result, production of gas and oil declined as producers cut back to adjust to decreased demand. Now, as travel and economic activity have picked back up, demand for gas has risen sharply. But production is still catching up. So the mismatch between lowered supply and increased demand is driving prices up.
The War in Ukraine
Russia’s invasion of Ukraine has impacted gas prices worldwide. First, there are sanctions on Russian oil and gas, which restrict supply globally. Second, the instability caused by the war has led to anxiety in the market and uncertainty about supply availability. This anxiety about supply contributes to rising prices as buyers are willing to pay more due to fears of reduced access to oil and gas.
Transitioning to Summer Gasoline
Refineries begin transitioning to summer gasoline blends around March each year. Summer gasoline is required in the U.S. starting June 1st in an effort to reduce smog during the summer driving season. Summer blends are more expensive to produce than winter blends, which contributes to rising gas prices during this seasonal transition.
Increased Oil Prices
Higher crude oil prices are also a significant driver of increased gas prices. Crude oil costs make up about 50-60% of the cost of a gallon of gas at the pump. So when global oil prices go up, gas prices follow.
| Date | Oil Price per Barrel |
|---|---|
| January 3, 2022 | $75 |
| March 8, 2022 (start of Ukraine war) | $123 |
| May 9, 2022 | $105 |
As shown in the table above, oil prices rose 63% between January 3 and March 8 following Russia’s invasion of Ukraine. Higher oil prices equal higher gas prices.
Refinery Capacity
Gasoline has to be refined from crude oil before it can be used. So refinery capacity and disruptions can also impact gas prices. Some refineries closed during COVID-19, which reduced capacity. There have also been some disruptions to oil refineries recently that have put pressure on gas supplies.
Taxes
Taxes also account for a portion of the cost of gas – about 15-20% on average. Some states have higher gas taxes than others, which results in regional differences in prices.
Other Factors
Some other issues contributing to high gas prices include:
- High corn prices – Because corn is a key ingredient in ethanol blended with gasoline.
- Strong demand – More people are traveling and commuting as pandemic restrictions ease.
- Geopolitical tensions – Instability in oil producing regions beyond just the Ukraine war.
- Tight inventories – Gas stockpiles are low compared to historical norms.
In summary, the main drivers of current high gas prices include: supply and demand imbalances as the economy rebounds from COVID-19, reduced access to Russian oil and gas, seasonal shifts to summer gasoline, elevated crude oil prices globally, refinery issues, taxes, and other secondary factors.
When Will Prices Come Down?
It’s unclear exactly when gas prices will decline again. Much depends on the duration of the war in Ukraine and sanctions on Russia. Prices often peak in early summer and then drop off after Labor Day when demand declines after the summer driving season. Barring additional global supply disruptions or other market shocks, prices could potentially moderate in the fall of 2022 as refineries shift back to cheaper winter gasoline blends.
However, some experts believe prices will remain elevated for the foreseeable future. Citi analysts predict prices could remain above $6 per gallon nationally through August. Areas like California may see $7 or more per gallon. The global oil supply situation needs time to restabilize after the shocks from COVID-19 and geopolitical events.
The best way for Americans to reduce pain at the pump is to cut back on unnecessary trips and travel. Carpooling, using public transportation, biking and walking when possible are other ways individuals can adapt to high gas prices. Reduced demand may eventually force prices downward again.
Impact on the Economy
Surging gas prices are taking a toll on American households and the economy as a whole. According to Moody’s Analytics, every 10 cent increase in gas prices costs the overall economy around $9.4 billion annually.
Higher fuel costs eat into consumer budgets, leaving less money for discretionary spending and other needs. This can slow economic growth. People who drive for a living like truck drivers, Uber drivers and delivery workers are especially hurt by spiking gas prices.
Many businesses are also dealing with substantially higher transportation and materials costs due to pricier fuel. This can lead to either lower profits or businesses passing costs along to consumers through price increases on goods and services, contributing to inflation.
On the positive side, regions with substantial oil and gas industries may benefit economically from higher prices. Oil producing states like Texas, North Dakota, Oklahoma, Louisiana, Alaska and parts of the West and Northeast are seeing job growth and increased drilling activity as prices rise.
But overall, analysts agree the economic negatives of expensive gas outweigh the positives right now. It’s one more headwind for the U.S. economy alongside inflation and rising interest rates. Policymakers are contemplating moves like suspending gas taxes to provide some relief to consumers, but most believe the pain at the pump will persist for some time.
How Gas Prices Work
To understand why gas prices fluctuate, it helps to understand how the price at the pump is determined and what goes into the cost.
There are four main components that make up the retail price of gas:
- The cost of crude oil – This accounts for the majority of the pump price, around 55%. Global supply and demand determines oil prices.
- Refining costs – Refining crude into gasoline accounts for around 18% of the retail price.
- Distribution and marketing costs – Getting the gas to stations accounts for 11%.
- Taxes – Local, state and federal taxes account for 12-15% of the cost per gallon.
The price that gas stations pay for wholesale gasoline is determined daily based on area spot markets. Then gas stations set retail prices based on the wholesale price plus their operating costs and desired profit margins. This allows pump prices to adjust quickly to crude price swings.
Historical Price Trends
Gas prices fluctuate regularly based on oil markets, seasonal factors, regulations, global events and other issues. Here is a look at average U.S. gas prices over the past couple decades:
- 1990s – Under $1.50/gal for most of the decade. $1.10 in 1998.
- 2000s – Rose from around $1.50 at the start of the decade to over $4.00 in 2008. $1.61 in 2001.
- 2010s – Peaked above $3.60 in 2012. As low as $2.07 in 2016.
- 2020 – Averaged $2.18 per gallon.
- 2021 – Averaged $3.02 per gallon.
- 2022 – National average recently exceeded $5.00 per gallon.
Gas prices are very cyclical and rise and fall based on a variety of national and global factors. But the dramatic spike to over $5.00 on average in 2022 is an unprecedented event driven largely by the Russian war in Ukraine disrupting global oil supplies.
Regional Price Differences
While the national average gas price recently exceeded $5 per gallon, there are significant regional differences across the United States:
| State | Regular Gas Price per Gallon (June 2022) |
|---|---|
| California | $6.40 |
| Nevada | $5.56 |
| Washington | $5.52 |
| Alaska | $5.48 |
| Illinois | $5.42 |
| … | … |
| Mississippi | $4.52 |
| Arkansas | $4.51 |
| Oklahoma | $4.46 |
| Louisiana | $4.42 |
| Texas | $4.34 |
Factors causing differences include: proximity to oil refineries, state gas taxes, blending requirements, population density, and whether the state has access to ports and pipelines.
Conclusion
Painfully high gas prices above $5 per gallon nationally are the result of several converging factors – primarily supply/demand imbalances, the Russian war in Ukraine, rising crude oil prices, seasonal shifts to summer gas, and refinery issues. Prices may moderate in the fall, but likely remain elevated well above historical norms for some time. Americans will need to adjust spending and travel behaviors until the global oil supply situation stabillizes. Policymakers may provide some temporary relief through gas tax holidays. But in the end, the problem of expensive fuel will require more production, alternative energy sources, and reduced driving to ameliorate long-term.
