Given all the energy headlines this week, we have a Special Edition newsletter to take a look at all things gas and oil prices. One of the ripple effects of the war in Ukraine is that prices at the pump, which were already nearing record highs, have now hit all-time records-- $4.25 a gallon, per AAA-- and are expected to stay there for awhile.
In this edition we'll take a look at why gas prices are so high, when they might come down, and the factors that actually affect the price we pay at the pump. It's your GAS & OIL PRICES 101.
So buckle up,
And PS: We'd love to do this with other topics as well. So show us some love and share this edition with friends, and let us know you think.
FIRST THINGS FIRST: What goes into the price of a gallon of gas?
The cost of crude oil
Refining costs and profits
Distribution and marketing costs and profits
Let's start with the cost of crude oil, which makes up the largest percentage of the retail price of gas. The price of crude oil is globally determined--- driven by SUPPLY, DEMAND, TRADERS and GEOPOLITICS🌎.
In short this means how much crude oil is available versus how much people are using, + international events like what is happening in Ukraine. And then you have the speculators and traders betting on those trends to determine the final price. Any supply disruption anywhere in the world will affect the cost of oil.
“Crude oil is a globally-priced commodity. So whatever the price is set by the market, that's what we pay.” -- Robert Sinclair, AAA.
Why is crude so important? Crude oil, a fossil fuel, along with petrochemicals like ethanol, is what makes up the gasoline that fuels your car’s engine.
THROWBACK THURSDAY: This is why less than two years ago, on April 20, 2020, oil prices went NEGATIVE for the first time ever. At the start of the pandemic, as much of the world was shut down, there was too much oil supply and collapsing demand. That meant that oil producers were literally paying buyers to take it off their hands. At the time, U.S. gas prices averaged about $2.90 a gallon.
FAST FORWARD: The economy has roared back, demand is up, and production hasn't kept up. According to the NY Times, western oil companies, partly under pressure from their own investors, are "drilling fewer wells than they did before the pandemic to restrain the increase in supply." They are also facing pressure from environmentalists who are pushing for less drilling to meet increasing concerns about climate change and turn away from fossil fuels.
And then there is OPEC (The Organization of the Petroleum Exporting Countries)-- 13 countries that control about 40% of global oil production---which also pulled back production at the start of the pandemic. While they're now pumping more oil, several members have been falling short of their quotas. (They learned a lesson back in 2014 when they increased production and prices dropped.)
So where do things stand? The U.S. is the largest producer of crude oil in the world, and production is forecast to rise to record-highs in 2022 and 2023. Even so, the US has not been energy independent --when it comes to oil -- in modern times given it is also the largest consumer of oil in the world, so it needs to supplement with imports.
Now let's factor in the war in Ukraine. Russia produces 10 million barrels of oil a day, or roughly one of every 10 barrels used around the world on any given day.
President Biden banned Russian oil exports into the United States this week. The US only gets about 3% of its oil from Russia compared to 61% from Canada, 10% from Mexico, and six percent from Saudi Arabia in 2021.
Despite the small amount, the US will still need to make it up. Where from? Well the US is looking at a few potential sources: some increased domestic production (we are already at record highs and need more rigs), Canada, Venezuela, Saudi Arabia and/or Persian Gulf countries.
Europe gets a huge portion of its oil from Russia, so a disruption of oil could cripple the global energy supply chain.
Bottom line: "This war is leading to instability in the markets and oil traders don’t like instability,” said Sinclair.
Check out the chart below from earlier this week for how quickly the price of oil shot up just on speculation that the US and potentially Europe would shut off Russian imports.
The second piece of the gas puzzle is refinery costs. Before oil can be used, it has to be broken down and purified through a process known as "refining." Refining costs vary by season and region. And not all refineries are the same, as not all types of oil are the same- ranging from heavy to light to sour. (see below)
Believe it or not, summer-blend gasoline is more expensive to make than winter-blend gasoline by as much at 15 cents a gallon. (Plus, there's usually more demand in summer, also sending the prices higher.)
Different regions also have different environmental standards. California requires cleaner gas than most other states. The environmental rules that "mandate that gasoline sold within the state be produced according to strict formulas that reduce pollution. But the gas is more expensive and difficult to produce than dirtier fuel sold elsewhere." ~ LA Times
Regional access to oil refineries plays a big role in determining the price of gas in an area. Most gasoline is shipped from refineries to terminals near the consuming area via pipeline. The gas is then delivered to individual gas stations by tanker trucks. ~ US Energy Information Administration
In the US, many oil refineries are located along the Gulf Coast. (This is why oil costs can skyrocket when a hurricane hits the area and can potentially damage a refinery.) ~ Investopedia
Most of the eastern seaboard is close to the Gulf Coast, allowing costs there to be lower.
California has less access to oil refineries. The Rocky Mountains act as a barrier and "limits the number of pipelines connecting the region to the rest of the country." Just one reason gas prices are more expensive in California. (CNBC)
Individual gas stations also play a role in determining the price at the pump. There's overhead that varies by state and location, like employee salaries and benefits, and the cost of insurance and leasing equipment.
Gas station owners actually have little control over the price at the pump. As we saw, most of the costs are out of their hands, although there's some wiggle room. It's a bit counter intuitive, but most individual owners don't like it when gas prices are high. For one, drivers cut back. Plus, the owners make a lot of their money on snacks and other products sold inside the stores. When gas prices go up, people have less money to spend on other items.
The final piece of the gas price puzzle is taxes, which are added on to the price you pay at the pump. The federal tax on gas is 18.3 cents per gallon and the average state tax is almost 31 cents.
Here's how some states stack up:
On the higher end of the spectrum: California (69.98 cents per gallon), Illinois (59.56), Pennsylvania (58.7)
In California, federal and state taxes account for 15% of the price of gas.
On the lower end, the cheapest state gas taxes are in: Mississippi (18.79), Missouri (17.42) and Alaska (14.98).
So when might we see some relief? Look to the late fall/early winter as of right now.
Gasbuddy projects the worst is yet to come when looking at average prices. The national average could reach $5 a gallon due to the situation in Ukraine. While prices are expected to decline after May, the average is expected to remain over $4 until November. The average for 2022 is expected to be $3.99.
Keep it under 65 MPH. As you start going faster, the engine has to work harder to overcome increased wind resistance and that ruins fuel economy according to Sinclair.
Other tips from AAA — make sure your tires are properly inflated, avoid idling, accelerate and brake gently and also lighten the load of your car (get rid of that junk in your trunk!).
Also remember - gasoline is often more expensive at stations along and near highways, and cheaper at big box stores.
Regardless, if things don't get better by 2023, you're taking a look at our next car:
Ok, that's your GAS Prices 101. Still want to learn more? (We won't judge.) Here are a few good resources:
** Send me your suggestions for future topics. See you Friday with a regular newsletter edition.
[Top Photo Banner Credit: FREDERIC J. BROWN/AFP via Getty Images]