Numerous factors are pushing prices up, with regular gasoline hitting a record $4.87 a gallon Monday according to AAA’s survey — up 25 cents a gallon in just the last week.
Gas prices were already expected to breach the $4 a gallon mark for the first time since 2008, with or without shots fired in Eastern Europe or economic sanctions imposed on Russia. But now the national average is expected to hit $5 a gallon within the next two weeks, said Tom Kloza, global head of energy analysis for the OPIS, which tracks gas prices for AAA.
“I think we reach $5 somewhere between this weekend and Juneteenth/Father’s Day weekend,” he said.
More than one out of every five gas stations nationwide is now charging more than $5 a gallon for regular, and just more than half are charging $4.75.
There are 10 states, plus Washington, DC, where the average price is already at $5 or more: Alaska, Arizona, California, Hawaii, Indiana, Michigan, Illinois, Nevada, Oregon and Washington. Several more are within a penny of $5, so those states’ prices are likely only a day or two at most from crossing the mark.
That’s because there’s a number of reasons beside the disruption of Russian oil exports driving prices higher according to Kloza. And making predictions about where prices will go has proved difficult. As school let out and summer travel picks up, so will gasoline demand and price, he said.
“Anything goes from June 20 to Labor Day,” Kloza said. “We could certainly see the national average approach $6.”
Here’s what’s behind the record price surge:
Russia’s invasion of Ukraine
Very little of that went to the United States. In 2021 Europe got 60% of the oil and 20% went to China. But oil is priced on global commodity markets, so the loss of Russian oil affects prices around the globe no matter where it is used.
China lockdowns ending
Less oil and gas from other sources
“The Biden administration is suddenly interested in more drilling, not less,” Robert McNally, president of consulting firm Rapidan Energy Group, said earlier this spring. “People are more worried about high oil prices than anything else.”
“They can’t find people, and can’t find equipment,” McNally added. “It’s not like they’re available at a premium price. They’re just not available.”
Oil stocks have generally lagged the broader market over the last two years, at least until the recent run-up in prices. Oil company executives would rather find ways to boost their share price than increase production.
“Oil and gas companies do not want to drill more,” Pavel Molchanov, an analyst at Raymond James, said earlier this spring. “They are under pressure from the financial community to pay more dividends, to do more share buybacks, instead of the proverbial ‘drill baby drill,’ which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed.”
Not only is oil production lagging behind pre-pandemic levels, US refining capacity is falling. Today, about 1 million fewer barrels of oil a day are available to be processed into gasoline, diesel, jet fuel and other petroleum-based products.
State and federal environmental rules are prompting some refineries to switch from oil to lower carbon renewable fuels. Some companies are closing older refineries rather than investing what it would cost to retool to keep them operating, especially with massive new refineries set to open overseas in Asia, the Middle East and Africa in 2023.
“Economics mandate you make more jet and diesel fuel to the detriment of gasoline,” said Kloza.
And with prices in Europe even higher than in the United States, both Canadian and US oil producers have increased exports of oil and gasoline to the continent. That has also limited the US supply.
Strong demand for gas
But supply is only part of the equation for prices. Demand is the other key, and while it’s very strong right now, it’s still not back to pre-pandemic levels.
The end of the Omicron surge and the removal of many Covid restrictions is encouraging people to get out of the house for more shopping, entertainment and travel.
“Come hell or high gas prices, people are going to take vacations,” said Kloza.
Commuting may remain down slightly. Many who plan to return to the office will be there only three or four days a week, and the total number of jobs is still a bit below 2019 levels. But there will be periods, most likely this summer, with higher demand for gas than during comparable periods before the pandemic, Kloza predicts.
“Even before Ukraine, I was expecting to break the record,” Kloza said. “Now it’s a question of how much we break the record by.”
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