1) The cost of rental cars. For example, in 2018, I rented a car for 7 days at the daily cost of $33.01 @ day. (All of the costs that I will be referencing includes taxes and fees) In 2020, the cost was $46.38 @ day for a 6 day rental. Compare that to June 2022, where the rental rate was $82.40 @ day for a 9 day rental!
2) Gas prices. Continuing the trip examples above, in 2018 the cost of a gallon of gas averaged $2.52. In 2020, the average was $2.17 (Pandemic + supply exceeded demand). In June, 2022, the average cost of a gallon of gas was $4.96!
Now anyone who has purchased anything in the last year realizes that these are not the only areas impacted by the surge of inflation that we are currently experiencing. Grocery prices in 2022 are averaging over 7.8% higher than 2021. In fact if you've attempted to purchase electronics, cars, food, and even homes you have been impacted by the product and employee shortgages, as well as the disruption to shipping around the world.
But let's drill down and take a closer look at gas prices to see what is driving costs so high.
There are at least 7 major factors that play a part in the pricing of oil but here are the three main culprits:
1) After the pandemic started winding down in late 2021 and 2022, the demand for oil has risen substantially. In early 2020 the price of a barrel of oil was just over a $1.00 due to the lowered demand and backlog of supply. Today the price of crude oil is over $112.00 a barrel.
2) The invasion of Ukraine by Russia has caused the worldwide supply of oil to shrink and therefore the prices to go up.
3) The Biden's administration disapproval of U.S. development of oil and gas resources, which was signaled within less than 30 days of President Biden's inauguration. Not mention Biden's tense relationship with Saudi Arabia, which has also played a part in reduced oil production. The Saudis' are still angry about the U.S. withdrawal from Afghanistan and the lack of support for Saudi Arabia's intervention in the Yemen civil war. This has combined to cause the Saudi's, and their influence over OPEC, to reduce the supply available to the U.S. Then lets add in the diminishing supply of oil due to dismantling of the Keystone pipeline. All of these factors are combining to ensure the prices are not only reaching record levels, but may stay for there for months / years to come.
This also brings up the influence of the President and his bully pulpit. Biden's administration’s messaging created uncertainty from investors who were leery about funding new oil and gas production wells. Historically, Presidents have had limited tools to help with gas prices, but they do have some power. One short-term tool is messaging. Releasing oil reserves is another way a president can help ease gas prices. Another possibility would be to lower the federal gas tax, which is $18.40 cents per gallon; however, because the majority of the tax goes to national highways it is unlikely that will happen, he said. Biden could also help by announcing the reopening of pipeline projects that were closed.
Because Americans are generally presidency oriented, presidents tend to get blamed for high prices. The 1973 oil embargo imposed on the United States by oil-producing states in the Persian Gulf region created a spike in gas prices during President Richard Nixon’s administration. During the Iranian Revolution in 1979, gas prices spiked, creating lines and limiting consumers on how many gallons they could get. President Jimmy Carter was blamed for the high gas prices at the time. Public expectations of the presidency have grown since as far back as President Franklin Delano Roosevelt, and gas prices are one of the more immediate expectations of most Americans.
U.S. oil companies have been reluctant or unable to resume producing oil at pre-pandemic levels amid concerns that tougher environmental rules could cut future demand. And even though the Biden administration has been quietly backpedaling on their previous public disapproval in an attempt to persuade oil companies to resume drilling and research, it takes time to change the course of such a large industry.
Oil companies can't find trained personnel and they can't purchase equipment due to the supply chain breakdown. And its not that they would have to pay more, these resources are not available. Period.
"Oil and gas companies do not want to drill more," Pavel Molchanov, an analyst at Raymond James, said earlier this spring. "They are under pressure from the financial community to pay more dividends, to do more share buybacks, instead of the proverbial 'drill baby drill,' which is the way they would have done things 10 years ago. Corporate strategy has fundamentally changed."
One of the starkest examples: ExxonMobil (XOM) last month announced first quarter profits of $8.8 billion, more than triple the level of a year ago when excluding special items. It also announced a $30 billion share repurchase plan, far more than the $21 billion to $24 billion it expects to spend on all capital investment, including searching for new oil.
Not only is oil production lagging behind pre-pandemic levels, US refining capacity is falling. Today, about 1 million fewer barrels of oil a day are available to be processed into gasoline, diesel, jet fuel and other petroleum-based products.
State and federal environmental rules are prompting some refineries to switch from oil to lower carbon renewable fuels. Some companies are closing older refineries rather than investing what it would cost to retool to keep them operating, especially with massive new refineries set to open overseas in Asia, the Middle East and Africa in 2023.
And the fact that diesel and jet fuel prices are up far more than gasoline prices shows that refiners are shifting more of their production to those products.
Despite all of the economic upheaval and rising costs, the start of the summer travel season on Memorial Day weekend sparked the typical annual increases in demand for gas and jet fuel. US airlines all report very strong bookings for summer travel, even with airfares climbing above pre-pandemic levels.
And yet, come hell or high gas prices, people are going to take vacations. And buy food, cars, and houses. Rising costs are, I'm afraid, are now our constant companions.
