Gasoline price .. Why did it rise to record levels and will stay high for a long time?

New York, USA (CNN) – The Russian occupation of Ukraine is the main reason why American drivers are paying record prices for gasoline. But this is not the only reason for the sudden increase.

Several factors are driving up prices, with regular gasoline reaching a record $ 4.67 per gallon on Wednesday according to an AAA survey.

Gasoline prices were already expected to exceed $ 4 a gallon for the first time since 2008, with or without what is happening in Eastern Europe or economic sanctions against Russia.

This is due to a number of factors in addition to disrupting Russian oil exports by raising prices according to Tom Kluza, global head of energy analysis at OPIS, which tracks AAA gasoline prices. It has proven difficult to predict where prices will go. Wednesday was already higher than Klose’s forecast a few weeks ago. He said that with school holidays and the increase of summer travel, the demand for gasoline will increase.

Here’s what hides behind the record price increase:

Russian invasion of Ukraine

Russia is one of the largest oil exporters on the planet. In December, it shipped about 8 million barrels of oil and other petroleum products to world markets, including 5 million barrels of crude oil.

Very few of them went to the United States. In 2021, Europe got 60% of the oil and 20% went to China. But oil is priced in global commodity markets, so the loss of Russian oil affects prices around the world, no matter where it is used.

Concerns about the collapse of global markets prompted Western countries to initially exclude Russian oil and natural gas from sanctions they had imposed in protest of the occupation.

But in March, the United States announced a formal ban on all Russian energy imports. On Monday, the European Union announced a ban on the import of Russian oil by ship, which represents about two-thirds of the oil that European countries import from Russia. Russian oil is being removed slowly and steadily from world markets.

End of closures in China

One of the factors that kept oil prices somewhat under control was the rise in Covid cases and strict blocking rules in most parts of the country. This was a major setback in oil demand.

But as the spread of the Corona virus began to slow, blockages were lifted in major cities like Shanghai, thus increasing demand without boosting supply leading to higher prices.

Reduced amount of oil and gas from other sources

Oil prices fell when pandemic-related home stays around the world suppressed demand in the spring of 2020 and crude oil was briefly traded at negative prices. In response, OPEC and its allies, including Russia, agreed to cut output as a way to support prices. Even when demand returned faster than expected, they kept production targets low.

American oil companies do not adhere to those production targets. But has been reluctant or unable to resume oil production to pre-pandemic levels amid concerns that stricter environmental rules could reduce demand in the future. Many of those stricter rules have been reduced or have failed to become law.

Oil stocks have generally fallen from the wider market over the past two years, at least until the last price increase. Executives of oil companies would rather find ways to raise the price of their shares than increase production.

Not only has oil production declined from pre-pandemic levels, but U.S. refining capacity is declining. Federal and state environmental regulations also encourage some refiners to switch from oil to low-carbon renewable fuels. Some companies are closing old refineries instead of investing in restoring them to continue operating, especially with new large refineries planned to open overseas in Asia, the Middle East and Africa in 2023.

The fact that the prices of oil and jet fuel are much higher than the prices of gasoline, shows that refineries are deviating more from their production towards these products.

High demand for oil

Supply is only part of the price equation, demand is the other key, although it is very strong at the moment, it has not returned to pre-pandemic levels.

The U.S. economy recorded record job growth in 2021, and while these earnings have slowed, they remain historically strong. Demand is rising again with many employees working from home for the past two years returning to the office.

The start of the summer travel season on the weekend is likely to produce the typical annual increase in demand for gasoline and jet fuel. All US airlines are reporting very strong summer travel bookings, even with airline tickets above pre-pandemic levels.

Mobility may remain slightly lower, there will be many who plan to return to office only three or four days a week and the total number of jobs is still slightly below 2019 levels, but Klosa expects to have periods, probably this summer. , when demand for gasoline will increase compared to similar periods preceding the epidemic.

“Even before the crisis in Ukraine, I expected to break the record,” said Kloza. “Now it is how much that record will be broken.”

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