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Why Are Gas Prices So High? Thumbnail

Why Are Gas Prices So High?

Why Are Gas Prices So High?

Allow me to begin with a few “truths” that may have very little to do with the price of petroleum products in the US.

  • The US is the top oil producer in the world. (1)
  • The US had been getting less than 10% of its oil from Russia. (2)
  • The US produces almost as much oil as it uses…” energy independent”

 

Commodities like oil are sold on a global market.   Just because the US is the top global producer does not make prices here independent or separate from what is going on globally with supply and demand.  Russia is the third highest producer of oil in the world with Saudi Arabia number two, and China, Canada, Iraq, and the United Arab Emirates each at about 1/3 the leaders. (3)

 

There are very few nations willing to buy Russian oil today.  When the third largest producer is taken off the table, the supply needs to be filled from others.  When demand goes up, so does the price.  Plus, fewer ships are willing to transport Russian oil and even fewer insurance companies are willing to insure the cargo which, in turn, increases cost.  Add to that the sanctions on the Russian banking system, even if someone wants to buy Russian oil, they may not have a way to pay for it.  

 

Why can’t the US and others just pump more oil?  Do you remember the early days of Covid?  Prior to the pandemic, oil prices actually went negative as Russia and the Saudi producers competed for market share and drove prices to zero and below for a short time.  Then the pandemic hit and demand cratered.  OPEC+ (this includes Russia) heavily cut production to support prices.  This policy has continued as economies recovered and oil prices approached $80 per barrel in late 2021.  Allow me to repeat, oil was almost free in the Spring of 2020 and $80 eighteen months later.   

 

In many ways, it is not that oil companies cannot pump more.  They just don’t want to.  They are making a great profit without the risks that increased production brings.  Governments (including the US) cannot make production go up.  

 

But the US is not part of OPEC+, why don’t US companies ramp up production?  It comes back to Covid and the prior drop in oil prices.  The reduced demand caused a huge disruption in the industry.  Many small producers went bankrupt.  Major producers are public companies and they saw their share prices suffer.  They see their future as “energy companies” and not oil companies.  They realize that climate change will force the use of more clean and renewable energy and they are focused on investment in that sector and not just drilling for oil.   Add in the difficulty of finding oil field workers and equipment which all involve significant cost with uncertain long-term profit.  As was stated before, at today’s prices and the current production level, profits are great.  Increasing production is expensive with no assurance of these same high prices when the oil comes out of the ground. (4)

 

The last issue, that no one is talking about, affecting gas prices in the US is something called the “Jones Act,” passed in 1920. (5)  This law places restrictions on ships allowed to be used for “interstate” transport of goods from one US port to another.  This means that refineries on the East and West Coasts of this country can only receive oil shipped on a limited number of ships.  Due to the lack of allowable ships, it is therefore, in many cases not profitable to ship oil from the Gulf to the coasts.  Lacking pipelines and limited ships, refineries on the Coasts mostly import the oil they refine.  Meaning they pay global prices.  This is also largely responsible for the high prices of everything in Hawaii.   Google this one…it is a great example of why you can’t keep doing stuff the same way.

 

Our price at the pump is painful…. especially if your mileage is anything less than 35 to 53 miles per gallon like my Toyotas…(the truck is parked and only driven when necessary).  There is no easy or quick solution.  This problem is a convergence of surging demand (due to economic and Covid recovery) and reduced product availability.  None of which any of us has much control over.

 

Researching this helped me understand “the why” of the situation “s what it is.”  I am reminded that much of life is beyond my control.  However, I refuse to be fatalistic.  Fortunately, I am lucky to have a choice of the vehicles I drive and how I heat my home.  It also reminds me that decisions I make today will have long-lasting impacts.   Don’t look for a quick-fix or make knee-jerk reactions to events of the day.  I am reminded to study my options and make thoughtful decisions, sort of like my financial plan.  But I guess this is part of my financial plan.  Thanks for your time.

 

Wollman Wealth Designs is a financial planning and investment advisory firm with an office in Escondido, CA partnering with clients throughout San Diego, California and the country.  Please call or email with questions or comments.

 

 

1)https://www.cnn.com/2022/03/12/energy/us-gas-prices-russia-oil/index.html

2)   https://www.wsj.com/articles/why-does-the-u-s-still-buy-russian-oil-11646151935

3)https://www.worldometers.info/oil/oil-production-by-country/

4)https://www.investopedia.com/ask/answers/061115/how-long-does-it-take-oil-and-gas-producer-go-drilling-production.asp

5) https://www.aei.org/american-boondoggle/oil-and-the-jones-act/


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