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Why Is Gas So Expensive?
Gas is Gassing Us!
Are you the same average Joe who’s getting squeezed by rising gas prices every day? Millions of Americans feel the pinch at the pump as gas prices continue to increase at an alarming rate. It’s also raising questions about why fuel costs so much and who’s to blame. In addition, customers are curious when they can expect some respite.
Surely, you’re wondering what’s going on here. Why is gas so expensive? You know the world population is way beyond seven billion people, and the reserves of fossil fuels are limited. We have already consumed a major chunk of those limited reserves, thanks to our rising demands.
Most companies do not produce oil; they import it. But, as the noose of demand continues to tighten, gas prices continue to rise higher. As if that weren’t bad enough, the conflict between Russia and Ukraine erupted, taking the already soaring gas prices to new unprecedented levels.
Are Gas Prices Going Up?
The question is a joke in and of itself. Every sane person will answer this question with a resounding yes. Demand is outstripping supply, which is raising gas prices around the world. However, when comes to gas prices in America, they fluctuate daily. For clarity, we don’t mean that the prices are going down, but rather that they are rising and rising.
Prices fluctuate simultaneously with crude oil prices, though their movement may differ. When there is more supply than demand, prices drop. The worldwide supply and demand determine the price of gas since it is a global commodity. As a result, prices fall when supply exceeds demand. This is Economics 101 in play.
However, other factors affect these prices, such as traders who buy or sell future gasoline contracts in commodity markets, supply chain issues, the rising value of the dollar, etc.
Do Oil & Gas Prices Change Daily?
Gasoline is a commodity traded in large quantities every day of the week. Each trade can change, so “the price changes daily.” It is valid for all commodities, including corn, wheat, copper, tin, iron, etc.
Futures markets determine gas prices. Speculators, traders, and users constantly assess the risk of scarcity to determine the right price. Prices change every second that the markets are open. Storage, transportation, and insurance are all factored into the local prices. You can participate in price setting by opening a futures account and taking long or short positions in the crude oil and gasoline markets. But, of course, you’ll need some risk capital to get started.
Why Are Gas Prices Going Up?
Crude oil extracted from the ground must go through several refining processes before it is fit for human consumption. We convert the viscous components of crude into other byproducts, one of which is gasoline. Gasoline prices are affected by various factors, including supply and demand, state and local taxes, and transportation costs for moving gas.
At the most basic level, the price of crude oil will fluctuate based on the daily output of all global suppliers and the demand of all buyers.
Demand and Supply
Both gas and oil prices are affected by supply and demand, just like the majority of the products you buy. When demand exceeds supply, prices rise, and vice versa. For example, the exploration of new shale oil reserves in the United States increased oil supply in 2014, while gas prices fell, but that boom was short-lived as low prices drove many producers out of business.
Oil and gas prices are also affected by seasonal demand. You typically get to see higher gas prices in the spring. Summertime sees an increase in gas demand as families head out on vacation. In addition, summer-grade gasoline, which is more expensive to produce, is also required by regulations.
Traders in Commodities
Commodity traders, such as those who trade in gasoline, wheat, and gold, are also to blame for high gas prices. They purchase oil and gasoline on commodity futures markets. These markets enable businesses to buy gasoline contracts at a predetermined price for future delivery. However, the majority of traders have no intention of acquiring ownership. Instead, they intend to profit from the contract.
The ups and downs in these futures contracts impact both gas and oil prices. The price is determined by what buyers believe the future price of gas or oil will be.
The Value of the Dollar
Gas and oil prices also rise when the value of the US dollardeclines. Oil prices rose between 2002 and 2008 because the dollar depreciated significantly.
Why Are Oil Prices Rising?
Oil Price Hike Due to Russia’s Invasion of Ukraine
Crude oil prices rose above $ 100 per barrel in late February as Russia’s war in Ukraine became a reality before briefly falling back to $ 90. Following sanctions imposed by the United States and its Western allies on Russia, crude oil prices rose steadily for the next two weeks.
Shell, BP, and Exxon, all at the same time, abandoned energy deals with Russia. The administration of President Joe Biden has banned US imports of Russian oil, natural gas, and other petroleum products.
US sanctions against Russia’s oil, liquefied natural gas, and coal imports took effect on March 8. A global oil market exists, despite most of Russia’s oil being shipped to Europe and Asia. Due to sanctions against Russia, the global supply of oil has decreased. Despite this, demand has remained steady, leading to up to $7 per gallon gas prices in Los Angeles.
Higher Oil Prices’ Demand Component
When the Covid Recession hit the United States nearly two years ago, oil prices plummeted along with the stock market. As the novel coronavirus spread worldwide, governments imposed lockdowns to protect their citizens. Lockouts caused unprecedented economic disruptions, resulting in lower energy demand and lower oil prices.
Later in 2020, oil demand rebounded as national governments and central banks pumped trillions of dollars into the global economy to help workers and the unemployed. By early 2021, oil prices had returned to pre-pandemic levels.
Higher Oil Prices as a Result of Cuts of OPEC Production
Oil prices plummeted to record lows in April 2020 after tensions between Saudi Arabia and Russia erupted over the Covid-19 pandemic. However, that was a long time ago. Supply of oil has not been able to keep up with the resurgence in demand.
According to the Bank of America note, crude oil and refined product inventories plummeted from record highs in mid-2020 to multi-year lows in late 2021 due to a rapid rebound in consumption.
OPEC and its allies have been urged to increase its oil production despite the Biden administration’s calls for a reduction in nonrenewable resource consumption as a whole. According to the US Energy Information Administration, Saudi Arabia, OPEC’s most influential member’s 2020 oil output is expected to be 10.8 million oil barrels per day. Two years ago, there were 12.1 million people in the United States.
Oil Producers in The United States are not Rushing to Increase Output
Why? They don’t want to spend a lot of money drilling more oil wells only to witness a decrease in supply, a drop in prices, and a decline in profits.
The fracking boom’s central theme aided the United States get to the top spot in global oil production over the last fifteen years. Because of the drop in crude and gasoline prices due to an increase in supply, many companies have gone out of business because they took on too much debt to build infrastructure.
Institutional investors such as BlackRock are making a concerted effort to invest in companies with low environmental, social, and governance (ESG) risk.
Thus, it has diverted money from gasoline and oil producers instead of using it to increase production.
Have Russian Oil and Gas Prices Increased?
Russia is one of the world’s largest oil and gas producers. Any disruptions are likely to impact prices — disruptions that we already see significantly. The President of the United States announced that the country would ban imports of Russian oil, natural gas, and coal. The United Kingdom has also stated that it will no longer import Russian crude. These maneuvers triggered a spike in oil prices in the global market, which was already rising. The situation is sure to have repercussions throughout the global economy.
The price of a barrel of oil reached $130, its highest level since 2008. It’s bad enough that people who rely on fossil fuels for transportation and heating already have to deal with this.
The increase is partly due to sanctions imposed on Russia by the United States and other Western countries in response to its invasion of Ukraine. This week, US President Joe Biden went to ban Russian oil and gas imports.
Why Is California Gas So Expensive?
The cost of gasoline continues to rise. According to AAA, the current national average price is $4.32 per gallon. In California, however, it is $5.75 per gallon, the highest in the country.
California’s gas prices are consistently among the highest in the country. But why is this the case?
There are three main reasons for this:
“The first is that California is a fuel island. So we don’t have pipelines coming from Texas to provide crude,” said Kevin Slagle of the Western States Petroleum Association. According to him, California produces about 30% of the oil it requires. “The remaining 70% is imported from primarily foreign sources worldwide.”
According to Severin Borenstein, a professor at the Berkeley’s Haas School of Business, California, taxes in California are higher than in other states. “Our gasoline excise tax is 51 cents per gallon, compared to the national average of about 28 cents.” “There are also environmental fees,” he explained.
And what about number three? The use of cleaner-burning gasoline in California for the last 25 years has contributed to reducing pollution, Borenstein said. However, the final product will be more expensive because it costs more to make.
Final Words – Why Is Gas So Expensive?
As we’ve seen, several factors are driving up the cost of gasoline. The conflict between Russia and Ukraine and the state’s tax on gasoline have all contributed to the rise in gas prices in recent months.
The Russia and Ukraine conflict has played a significant role in the recent hike. If you believe that war only affects or burns those who participate, you are mistaken. It impacts everyone from the residents of Washington, DC, to the residents of the Arctic. We can tell you it is burning a hole in your pocket.
The most obvious pain point for most of us is filling up at the gas station. As a result, electric vehicles are among the most effective ways to deal with high gas prices, with hybrids coming in second. Electric vehicles are the next big thing, and considering the scenario; it is not surprising at all!