How Much Per Gallon?!
By Tavish McNulty | March 31, 2022
If you have driven off-campus recently, or possibly on your return trip from spring break, you most likely noticed a significant difference in your travel expenses. Natural gas and oil are so intertwined into our economy making them very volatile, as you can see by the daily changes in prices at the fuel pumps. But what could cause such a sharp increase by almost 50 cents in the last month and a dollar compared to last year? To answer this question, we must first put our economy in the context of the pandemic. In 2020, at the beginning of the coronavirus pandemic when lockdowns struck the globe and economic activity essentially froze, people did not need to travel nearly as much as they did prior. Thus, the oil and gas market was faced with a drastic negative shock to demand that lowered the price of gas through into 2020. To cope with this shock oil exporting countries reduced supply of oil and gas. According to the U.S. Energy Information Administration, average gas prices in the U.S. got as low as $1.93 per gallon and as high as $2.63 dollars per gallon, which was before the pandemic. As we began to understand more about the coronavirus and vaccines rolled out, we started the process of returning to business as usual. Suddenly, the market was hit with a positive shock to demand for gasoline. You would think that gas prices should then have returned to pre-pandemic prices, however, oil and gas companies have been slow to increase their supply to keep up with the increased demand, which expedited the rise in price. The first vaccines were available. Just a month after the first covid vaccine was released in December 2020 for emergency medical use, gas prices rose by almost 6% or 14 cents on average. By March of 2021 gas prices had exceeded pre-pandemic prices to $2.89 on average, just three months after the first vaccine was released. Other factors, however, were at play. New policies and mandates designed to make U.S. energy sources more eco-friendly such as the closure of the Keystone XL pipeline project in Canada all played a part in increasing gas prices. U.S. oil production was also faced with many more restrictions and carbon taxes increasing gas prices. It is in this setting that makes the recent shock to oil and gas, brought out by the conflict in Ukraine so much more impactful. To protest Russia’s invasion of Ukraine, many countries have banned buying Russian oil. In terms of just U.S. imports of petroleum, it doesn’t make much sense why our gas prices are so high since we only import about 7% of our oil and gas from Russia. However, you cannot look at just one country's imports and exports of oil and gas since the market is so globally intertwined as aforementioned. Russia is one of the world’s largest exporters of oil so for so many countries to ban their oil is to cut off a huge amount of global oil supply. Then, of course, this negative supply shock on oil increases price. To expedite this rapid rise in price, the conflict makes the market as a whole more tumultuous, which tends to increase prices. This is the most direct reason why gas prices have risen so dramatically. In this post-pandemic setting, oil companies have been slow to ramp up supply of these resources. As we can see in the past year, maintaining an eco-friendly economy is costly, yet it can be reduced on the supply side of the market. So if we want our wallets to not take such a hit at the pump heading home for Easter Break, countries are going to have to find a way to increase supply of oil and gas to counteract the ban on Russian oil.
Edited by Zachary Elias