Here's What's Going On With Oil & Gas Prices
Wed, April 20, 2022
The Consumer Price Index released a report this month showing an 18.3% increase in gasoline prices between February and March 2022. Energy prices overall increased 32% in the last year.
With continued inflation and accusations of “price gouging” against consumers, there has been an enormous outcry for more affordable prices at the pump.
Gas Prices Are Determined by Supply and Demand
The prices we pay as consumers are a direct result of the global market supply. Historically, the global oil market has been heavily influenced by a conglomerate of countries also known as the Organization of the Petroleum Exporting Countries (OPEC) that supply the world with essential energy resources. OPEC member countries produce about 40% of the world’s crude oil. The organization also represents 60% of the total petroleum traded internationally. With these market shares in mind, it’s important to note that changes in supply for any OPEC country is highly likely to cause a ripple effect in the international market.
In the case of gasoline prices, the relationship of supply and demand is no different than a regular consumer good. If the demand of a good increases and the supply remains the same, the price of that good will rise. In a free market, there are only two options to bring down the price of a good: increase aggregate supply or decrease demand.
As has been echoed recently, oil companies are historically price takers, not price makers, meaning that they do not control the price of the commodity as was evident in 2020 when the price of crude oil dropped below $0.
Economics commentator Doug Henwood recently showed there’s no evidence that the oil industry artificially jacks up gas prices when crude prices fall. According to data stretching all the way back to 2000, Henwood finds, for every 10 percent change in the price of oil over the course of a year, the price of gas moves by just 4.5 percent. The relationship holds in both directions.
In fact, as USA Today recently reported, there have been “more than 100 investigations” and not a single one has found any evidence of gasoline price gouging:
“More broadly, the retail gasoline market is fragmented despite consolidation that has left some companies owning multiple stations. If a gas station jacked up its pump price too sharply, it would lose business to rivals, says Phil Verleger, an industry analyst and economist and a senior fellow at the Niskanen Institute. Because of that kind of competition, it isn’t illegal for a company to raise its prices well above the rest of the market to fatten its profit margin.
‘There’s no such thing as price gouging,’ Verleger says. Over the past 30 years, there have been more than 100 investigations and lawsuits brought by consumers, the FTC and states attorneys general alleging such conspiracies in the gasoline market. ‘They all flopped,’ Verleger says.
Recent Years of Energy Pricing
The price of gasoline steadily increased long before its alarming price shock in late February. During the pandemic, demand for energy resources remained low due to decrease in travel and other activities. However, since supply was at relatively normal (in this case high) levels, the price of oil and gas rapidly decreased.
In July 2021, OPEC announced plans to ramp up production worldwide to jumpstart the post-pandemic recovery period. As consumers began to return to regular activities, demand increased but much faster than supply could manage. For example, U.S. production experienced roadblocks to increase supply due to a leasing ban on federal lands and other policies that sent market signals to investors that the future of U.S. oil and gas development is uncertain. Coupled with continued demand uncertainty as variants of the Covid-19 virus continue to arise, the result has been a steady rise in the price of gasoline since early 2021.
The conflict between Russia and Ukraine sped up the increase in price due to the disruption in global energy supply. As mentioned before, any time supply goes down and demand remains the same, the market price will go up. Russian petroleum plays a critical role in the global market share – Europe imports 40% of its natural gas from Russia. But for a country like Germany, the problem is even more acute. Germany imports up to 50% of its natural gas from Russia, 45% of its coal, and 34% on its oil.
U.S. sanctions on Russian oil imports and other petroleum products has added fuel to the disruption of the energy market, causing not only gas prices to increase, but commercial transportation and utilities as well.
"When the U.S. issues sanctions, that has wide ramifications on the ability of Russia to export oil," Patrick De Haan, head of petroleum analysis for price tracking company GasBuddy, told CBS News. "We don't import a lot, but somebody else does and we are making it difficult for Russian oil to flow to the global market, and prices are reacting to that."
Pricing has begun to decrease but not at the expedited rated that consumers are hoping for. Nationwide, as of this article's publication date (April 20, 2022) the average American is paying $4.114 for a gallon of regular, down from $4.083 a week ago. The downturn in prices can be partially attributed to the release of crude oil from the emergency reserves from several countries, including the U.S., although historically, this has provided only minor, temporary relief and is not a long-term solution.
Texans are ready to do their part to increase oil production, but as TIPRO President Ed Longanecker recently stated, leaders in Washington must “focus on how we can support increased domestic oil and gas production, both for today and tomorrow. This includes expediting permits for U.S. LNG export facilities and pipeline infrastructure, lifting the ban on federal leasing and generally a more stable regulatory environment that provides certainty to producers and investors.”
He added that certain actions will have a clear negative impact on everyone. “Overburdensome regulations, increased taxes and anti-oil and natural gas rhetoric will only exacerbate high energy prices and raise costs for American consumers.”