The pandemic and its lingering effects has impacted us in many ways outside of our health, including emotionally, mentally and financially. The financial impact is deep, as when the pandemic first began, the world had to make ends meet with no way of forecasting how their future would look. Many companies have had to reduce their workforce to cut costs to allow them to survive the pandemic. This has led to personnel layoffs and contracts being cut short as the uncertainty of employers grew bigger. The latest financial impact of the pandemic has been the domino effect it has had to gas prices in the recent years. The global pandemic caused a significant disruption in global supply chains, including oil.
SUPPLY & DEMAND
As working from home became the norm, the need to purchase gas decreased. As a result, the supply of gasoline increased and the price of gasoline decreased. Conversely, the same happened when the world became to emerge from the pandemic. Once travel regulations began to relax and people began to travel, commute, and vacation again, the need for gasoline increased. Thus, the cost of gasoline steadily increased and the supply of it decreased. Figure 1.0 [1] shows this direct impact of the supply and demand of gas over time.
The US Retail Gas Price is the average price that retail consumers pay per gallon for all grades and formulations. Figure 1.0 gives us a clear picture of how gas prices moved within the last two and a half years. However, even as the world began to recuperate from the ongoing pandemic, gas prices remained lower than $4 U.S. Dollars per gallon for quite some time. The steady and slow increase between March 2020 – Jan 2022 has an explanation. Supply and demand are not the only reasons as to why gas and oil prices have increased.
CRUDE OIL VS. GASOLINE
The main culprit driving the spike of gasoline is the price of crude oil. What is crude oil? Crude Oil is a naturally occurring petroleum product composed of hydrocarbon deposits and other organic materials. Before oil can be used, it has to be broken down in a process known as "refining." After being purchased, oil is shipped to various refineries around the world. In America, many (but certainly not all) of the oil refineries are located in the Gulf Coast region, with about 43 percent of America's oil being produced in Texas. This is a reason why oil costs tend to fluctuate during storm season. A large hurricane, for example, puts oil supplied at the refineries at risk of destruction.
Refining oil works in a relatively easy way. Crude oil is put into a boiler and turned into a vapor. From there, the vapor moves into a distillation chamber, where it is turned back into a liquid. Different types of oil are formed depending on the temperature they were distilled at. Gasoline, for example, is distilled at cooler temperatures than residual oils that are used to make products, such as asphalt and tar. After the many substances made from oil are processed, they arrive in various products to do a little bit of everything, from heating homes to powering cars.
According to the Energy Information Administration, as of April 2022 [2] the cost of the raw material used for gasoline accounted for 60 percent of the price of a gallon of regular gasoline. Comparatively, this was 25 percent in April 2020, when the demand for fuel decreased along with other goods and commodities.
In Figure 1.1 [3], we can see how the cost of a gallon is broken down by the crude oil prices, taxes, refining, and distribution and marketing. The biggest driver of the cost of gas is the price of crude oil, followed by the refining of crude oil.
The U.S. is the world’s largest producer of oil and processed petroleum products and, in recent years, it has become a major exporter, sending large quantities to Latin America and Europe. However, the U.S. is also a large importer of oil too. After China, the U.S. is the second largest oil importer in the world. All due to American refineries set up to process types of oil that are different from those produced in the United States.
It would be very costly and difficult to change refineries to process more U.S. oil, which is why the U.S. is likely to continue importing big quantities even if it were to produce more domestically. The United States also consumes more oil than it produces. Russia, by comparison, is the world’s second largest producer and accounts for roughly 1 in 10 barrels on the global market.
WAR IN UKRAINE
As depicted in Figure 1.0, the war in Ukraine another variable that has impacted the rise of oil and gas prices in recent months. Before Russia invaded Ukraine in February 2022, roughly half of Russia’s oil exports went to Europe, representing $10 billion in transactions a month. Last year, about 8 percent [4] of U.S. crude oil imports came from Russia. Since the beginning of the Ukraine war, Russia has been selling less oil in part because of sanctions imposed by the European Union, United States, and other major economies. By reducing the amount of oil received from Russia, this in turn reduces global supplies and has led to an increase in gas prices.
Gasoline prices follow oil to a great extent. Demand in most of the world is slowly returning to normal as the pandemic subsides. If Russia continues its aggression towards Ukraine, oil prices will likely remain elevated. Recently, there’s been a noticeable decrease [5] of the cost of gasoline due to the elimination of taxes incurred from filling up your gas tank in some states. Other reasons include an increase in gasoline production and decreases to the cost of crude oil. All these are positive signs that provides us with a little of bit of hope as to what next months will look like to the average consumer.
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