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Why gas prices are high, and what goes to the average cost per gallon


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1980s

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2020

Monthly average price for regular gas

Expected June average

$ 4.59 per gallon

Adjusted for inflation

Not adjusted




Source: Energy Information Administration


Note: Prices adjusted for inflation are in June 2022 dollars. The average price for June is a forecast.

Gas prices are at record highs in the United States. And even when adjusted for inflation, they have averaged at levels rarely seen in the last 50 years, including the energy crisis of the late 1970s. When fuel prices go up, consumers are directly harmed at the pump, but the higher transportation costs are indirectly when prices increase from everything from food to diapers to construction materials.

The single biggest factor driving the spike right now is the price of crude oil. As of April, raw material prices accounted for 60 percent of the regular gasoline price, according to the Energy Information Administration. This compares to 52 percent at the same time a year ago and just 25 percent in April 2020 – when the epidemic reduced demand for fuel along with other commodities and commodities.

What goes into the price of gas

Monthly input costs per gallon of regular gasoline, US average

Distribution and marketing

Rising oil prices are a major driver of gas prices.




Source: Energy Information Administration


Note: Not adjusted for inflation.

The effect of trade in the wider international market for oil and petroleum products is how much people pay for gas. But like many other aspects of the global economy, it comes down to supply and demand – and when the balance between those two forces is disrupted, costs inevitably swing.


Expensive oil becomes an expensive gas.

The United States is the world’s largest producer of oil and refined petroleum products. In recent years, it has become a major exporter, sending large quantities to Latin America and Europe.

But the United States buys a lot of oil from other countries. It is the world’s second largest importer after China. This is partly because American refineries are often set up to process oil different than the oil produced in the United States.

Reconfiguring refineries is more expensive and difficult to process than most US oil, which is why the United States is likely to continue importing large quantities even if it is produced more domestically. The United States also consumes more oil than it produces.

Russia, by comparison, is the second largest producer in the world and approximately 10 barrels in the global market. Before the country invaded Ukraine in February, half of Russia’s oil exports went to Europe, representing $ 10 billion a month in transactions. Last year, about 8 percent of US crude oil imports came from Russia.

US major oil producer – and major oil importer

Monthly crude oil is produced in the US

Monthly crude oil imported from the US

Source: Energy Information AdministrationNote: Production data goes up to May 2022, import data until March 2022.

Since the beginning of the Ukraine war, Russia has been selling less oil because of sanctions imposed by the European Union, the United States and other major economies. That has reduced global supply and caused a jump in prices.

To alleviate this growing crisis, the Biden administration is asking US oil companies and other large oil producers to increase their production, but it has not had much success. This is because there are fears that the oil authorities will increase prices if they increase production. And countries such as Saudi Arabia and the United Arab Emirates cannot quickly increase production enough to offset the expected decline in Russian supplies.

The effort to stabilize the oil market is at odds with Mr Biden’s ambition to move the country to electric cars and renewable energy.


Why is the No. 1 oil country producing less oil.

Prior to the onset, oil and gasoline prices were rising as the world gradually recovered from the Kovid epidemic. For some time in 2020, the price of a barrel of oil has dropped below zero because storage tanks were full of demand. Now, travelers and vacationers are back on the road and the offices and industries have reopened.

Prices have been rising since the epidemic.

Daily price of oil from early 2020

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$ 50

$ 100 per barrel

2020

2021

2022

June 6th

$ 118.41
Each barrel

Demand fell sharply during epidemic lockdowns, briefly pushing oil prices below zero.

The war in Ukraine has disrupted Russian oil supplies, leading to a rise in prices.




Source: Energy Information Administration


Note: West Texas intermediate oil prices. Prices are not adjusted for inflation.

Oil companies have been slow to respond to the rebound after workers were laid off and rigs canceled during the epidemic.

Two oil price crashes have occurred in the last eight years and many executives believe another is inevitable. That has led to hesitation to drill new wells and drastically increase production, said Christopher Knittel, an energy economist at the Massachusetts Institute of Technology. Lack of investment has led to a decline in production in recent years.

Companies are instead directing dividends to shareholders in the form of dividends or share repurchases.

“Even though they are looking at higher prices today, they are afraid the prices are gonna be in the lifetime of that well,” Mr. Nittel said of industry executives. “They have the expectation that electric vehicles will continue to grow, which means that after 10 years from now, the oil well may not make a profit.

At the same time, refineries are steadily shutting down for the same reason as oil companies are planning to transition to renewables, said John Ayers, vice president of energy consulting firm Turner and Mason.

The slowdown in domestic activity comes as global refinery capacity simply does not meet market demand. Together, these conditions may increase the barriers to global supply.

Analysts have suggested that as the war in Ukraine drags on and Russian production declines, the energy market may be fundamentally reversed. Over time, changes in the flow of oil may reduce Russian control over Europe. But until there is more supply online or demand is lower, the prices at the pump will be higher.

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