Gas prices are on the rise, and Americans might need to budget for a $3/gallon gasoline as we gradually emerge out of a lockdown, and things start easing out.
The rise in fuel prices is majorly driven by an increase in oil prices at the source, hitting $60 per barrel, recovering economy, and production cuts by Russia and OPEC. The prediction by Wall Street with the view that a new oil “super-cycle” is in the making has also played a role in the price increase.
The average gasoline price has been on a steady rise in the past few days and now stands at $2.89 per gallon, as per the AAA report. We haven’t experienced the $3 price per gallon since early 2014. Considering we’ve been locked down for quite some time now, people want to get out – and this means a sharp increase in demand as the lockdown and restriction measures ease out gradually.
A few states have already hit the $3 price per gallon, including Illinois, Arizona, Pennsylvania, Utah, California, and Nevada. This rise in gas price is quickly becoming a thorn in the fresh for the Biden’s administration. When President Joe Biden initiated a raft of new policies on the fossil fuels industry in response to the climate crisis, we expected some resistance.
Some critics with business and political interests are now trying to pin the blame for increased gas prices on the Joe Biden administration. In reality, energy industry insiders and experts are of a strong opinion that the increase has little to do with federal policy, at least for now. This is more about the recovering economy, and prices would have still gone up irrespective of who is in the White House.
Should We Expect the $80 Crude This Summer?
The oil market probably hit the lowest prices in decades during the pandemic, but the Wall Street reopening surge is making the industry the biggest winner as restrictions ease down. There has been an incredible rebound to a pandemic high of $66.09 in crude oil in March, up from the shocking negative 37 a barrel in April 2020.
When Russia and OPEC announced that they are extending their cut in production for an extra month, the price rise was even fueled further up. The increase in prices hasn’t been a smooth upward trend through –this is evident as the US crude oil price tumbled 6 percent to $61.4 a barrel triggered majorly by the unstable vaccine rollout in Europe.
There is however an expectation for the oil rally to return as the demand increases. Goldman Sachs, for instance, predicts that Brent Crude will increase from the current $65 per barrel to $80 before the end of summer. The recent drop was just a temporary pullback, and we can expect the prices to retrace the upward trend shortly.
Increasing Demand Vs. Suppressed Production
According to GasBuddy data, (which surveys over 150,000 gas stations across the country), there has been a sharp increase in gasoline demand nearing the levels witnessed just before the Corona pandemic early last year.
Google Map searches and overall searches for directions have recovered well above the levels witnessed in January 2020 in the US. On the contrary, similar searches remain below the January 2020 levels in the United Kingdom, Germany, and Italy.
With all these developments, we’re indeed likely to see oil prices hit the $3 average sooner than we expected. Other than road trips and the general desire to travel and explore the world once again, the increase in prices is also being aided by suppressed supply to the US markets. The oil boom was severely crushed by the pandemic, as more refineries cut their production drastically to stay profitable.
At the current price of over $60 a barrel, the US is only producing an average of 10.9 million barrels per day, compared to 13 million barrels per day in the same period of 2020. This means the US producers still have more capacity for additional production in case the prices get out of hand.
Biden and the Keystone Pipeline
While the general notion is that we might be hitting a $3 per gallon pandemic record-high soon, opinion leaders like Tom Kloza, the global head at Oil Price Information Service has a contrary opinion. He argues we might not hit the $3 price soon due to remote work, a high level of unemployment, and a drastic reduction in travels to major entertainment and sporting events.
Nonetheless, the increase in oil prices will serve the critics who believe Biden’s energy policies are going to impact the US consumer’s wallet negatively. In fact, during the campaign period, Biden’s team had to constantly fight the narrative that he would ban fracking.
Instead, Biden quickly moved to address the climate crisis by rescinding the Keystone Pipeline. In addition, he placed a moratorium on gas and oil leasing in the Arctic and activate the Paris Climate change agreement. Biden also issued a 60-day suspension of any new gas and oil drilling and leasing permits on federal lands. In reality, this suspension only applied to new permits and leases, and the suspension won’t be renewed after 60 days.
Analysts and industry experts are still of the opinion that Biden’s tough raft of policies on fossil fuel has very little to do with the current sharp rise in oil prices.
The Bottom line
So far the Biden’s policies on fossil fuel haven’t greatly impacted the price shift, however, if more severe policies that constraint US production are put in place, we could eventually witness even higher oil prices.
The current prices are not yet where the consumer will feel a pinch in the wallet, and even at $3 a gallon, Americans are not going to cancel their road trips or shy away from travel. The gradual reopening of the economy after the pandemic is exciting and no one wants to hold back this coming summer.
Overall, the oil industry doesn’t want to make the prices unbearable to the common consumer. Doing so could only accelerate the current gradual shift to electric vehicles, and that’s a gamble they don’t want to risk.