Most Americans have by now felt the impact of the ever-rising gas prices at the station. The national average is $4.305/gallon. With record-high levels in recent days, Americans are eager for relief. Given all the rhetoric surrounding gas prices, when can we expect to realistically see relief at the pump? Media is highlighting the Russian aggression in Ukraine, politicians fan the flames of inflation, and every day Americans are left footing the bill with unanswered questions and pleas. It’s hard to weed through all the back and forth to find honest answers and opinions, but the root cause of rising gas prices…. supply and demand.[1]
Whether you are on the side of inflation or Russia as the root cause of the rising gas prices, the real root cause is supply and demand and the answer to when we could expect to see relief is…NOT SOON! Spring and Summer are traditionally seasons when people, including most Americans, fly and travel more for leisure and vacation. This has historically and inherently driven commodity prices up and will do so in 2022. In addition, as gas prices rise sharply, as they have all year, retailers lose. The price rises quickly and the delay to raise retail prices is often far too late. In contrast, as the market falls, retailers are even more reluctant to drop retail prices with the market. They intentionally lag so they can recapture profit that was lost in the rising markets.
To find relief at the pump we need to understand what makes up retail prices of gasoline. John Eichberger’s article, “Fuel Prices- In Context, not Hype” is an excellent article worth reading and provides context to how gasoline retail prices are derived. Crude oil, taxes, refining, and distribution/marketing are the 4 main factors influencing retail price. Crude and taxes make up about 74% of the retail price at 58% and 17% respectively with refining and marketing/distribution averaging 13% each. [2] The COVID-19 pandemic plays a key role in the price of crude and refining. The demand destruction seen at the height of the pandemic has since recovered and were now consuming oil at and above pre-pandemic levels, however, refining has still not caught up. OPEC has taken measures to help correct, but the lag has driven up crude prices. Government can affect the taxes portion, but it would be a drop in the bucket at this point.
The real answer to solving gasoline retail price is, there is no short-term answer. There needs to be market correction in the form of supply and demand. Supply and distribution need to be increased responsibly to meet the world demand, but it’s coming at a time we are expecting to see record demand. In the words of John Eichberger, “only sustained stability and a rebalancing of supply and demand will provide relief at the pump. When this will occur is anyone’s guess.”
[1] https://www.newsnationnow.com/business/your-money/not-going-to-be-a-good-summer-why-gas-prices-are-still-high/
[2] https://www.fuelsinstitute.org/Resources/The-Commute/Fuels-Prices-In-Context-not-Hype
