Gas Prices are on the Rise: Here’s What You Need to Know
Brace yourselves because the cost of gas is increasing once again. According to AAA, the current national average for unleaded gasoline is $3.88 per gallon, the highest it has been in almost a year.
It’s important to note that while this is still far from the peak of $5 per gallon reached in June 2022, after Russia’s invasion of Ukraine caused oil supplies to dwindle, it is significantly higher than historical averages. Typically, gas prices rise during the summer, but the increase has been slow yet steady. Since the beginning of the year, gas prices have risen approximately 20%, and they have increased by more than 8% since June 1.
Keep in mind that the national average masks some regional differences. For example, in California, gas prices have surged over 10% in just the past month, reaching an average of $5.79 per gallon. On the other hand, prices have fallen in Georgia and Florida, currently sitting at $3.36 and $3.67 respectively.
Impact on Inflation and the Economy
Rising gas prices pose challenges for both elected officials and consumers, particularly those with lower incomes. Additionally, policymakers at the Federal Reserve face the task of reining in rapid inflation that has been prevalent in the last 18 months.
It’s worth noting that gas prices are not included in “core inflation,” a metric closely monitored by the Fed, as it excludes energy and food prices due to their volatility. However, Federal Reserve Chair Jerome H. Powell acknowledges the importance of energy prices in shaping consumer sentiment and expectations.
Powell commented, “Energy prices being higher is a significant thing,” and emphasized that sustained high energy prices can impact consumer spending.
Now, let’s delve into what is causing this recent surge in gas prices and speculate on where they might go from here.
What’s Behind the Increase?
Gas prices are predominantly influenced by the price of oil on commodity markets, making them susceptible to a range of factors such as geopolitics, weather conditions, and investor sentiment.
Factors impacting oil prices
Crude oil prices have surged in recent months, with the American crude benchmark, West Texas Intermediate, rising by nearly 30% since June 1. Various reasons contribute to this rise. Saudi Arabia and Russia have curtailed production until the end of 2023, and despite China’s economic downturn, it continues to import oil at a high rate to mitigate geopolitical risks and support its manufacturing and transportation sectors.
Additionally, the unusually hot summer in the Northern Hemisphere has impacted production capacity at refineries. This reduced capacity, combined with maintenance of refineries in California, has led to supply shortages and contributed to the recent price increases in the state.
Analysts highlight the problems faced by several California refineries in recent weeks, which have caused disruptions in service, as a significant factor in the recent price surge.
The Outlook and Possible Relief
President Biden has turned to the Strategic Petroleum Reserve in an attempt to alleviate oil and gas prices. However, the reserve is historically low, and the government has decided to delay restocking until prices decrease.
Relief on the Horizon?
On a positive note, most states typically transition to a cheaper gasoline blend containing more butane during the fall, which helps lower prices. Additionally, demand for gas tends to decrease after the peak driving season, leading to a decline in prices.
Tom Kloza, an energy analysis expert at Oil Price Information Service, believes that the worst is over in terms of high gas prices and their impact on consumers.
Furthermore, global economic growth is projected to slow in 2024, which will result in decreased demand for oil and subsequently push gas prices down.
Some analysts also suggest that the production cuts from Saudi Arabia and Russia may not continue into the new year, potentially alleviating further pressure on prices.
The Current Situation for Oil Producers
While the production cuts implemented by Saudi Arabia and Russia have driven prices up by limiting supply, these cuts have already proven profitable for major oil producers. As a result, there may not be a need for extended cuts in the future to prevent excessive inflation and depressed consumption.
Clay Seigle, Director of Global Oil Services at Rapidan Energy Group, suggests that the oil producers should consider the current market conditions as a success and refrain from further production cuts.
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