What's-Up With The Price At The Pump?

Greetings!

I bring you glad tidings of supply-demand economics and an admonition to steer clear of magical, wishful thinking and disinformation found in the Face Book cesspool of lazy economic thought.  

Consider the cost of a gallon of petrol nowadays – $4.64 at the Shell station in Sturgeon Bay yesterday.  That's come down a bit lately, yet remains almost a couple of bucks higher than what it was a year ago.  Filling your tank is even costlier in some parts of the country (be grateful you do not live in LA County).  

On Face Book it is frequently implied that our presidents establish the price of gasoline. I wonder - is there a big switch in the White House basement bunker that POTUS flips to peg the price at the pump?  We all know that isn't true.  Here at least.  

It was true in a place we call Venezuela.  This country happens to be a major oil-producing nation and the government subsidized the price of gasoline (and a lot of other things) to curry favor with the populace.  But I think we all know how that socialist worker paradise turned-out.  Sadly, a nation awash in oil and the entire shebang collapsed.  The lesson is to be careful what you ask for.  But I digress.

I understand that economics is sometimes hard to wrap your mind-around.  Back when I had a day job as a wealth manager and trusted financial advisor I made a very good living making complicated economic and financial subject matter understandable for the average person.  Here’s a simple explanation to keep the facts straight.  

There are only a handful of contributors to the price of a gallon of gasoline – with the largest contributor being crude-oil prices. Presently at 60% - the largest driver of the cost of a gallon of gasoline is the price of crude oil.  This is compared to 25% in April of 2020.  My recollection is that this was when the pandemic crushed the cost of crude as demand fell along with that of other goods and commodities.   

 

Other contributors to the cost of a gallon of gasoline include (in this order) refining, state and federal taxes and distribution and marketing. 

Crude oil is a dollar-denominated commodity that trades on the global market.  The price of crude is considerably higher today than a year ago and higher still than two years ago. So, if you’re pining for the days of yore when gas was really cheap you need to consider your willingness to revisit a period of Covid restrictions, lock downs, a global collapse of travel, tens of millions of unemployed and a tanking economy that contributed to the collapse of crude oil prices. My recollection of that hot mess is still quite fresh and I want nothing to do with it.

 

Complicating matters is the Russian invasion of Ukraine.  On their own, wars generally rattle commodity markets.  As a major oil producer the economic sanctions placed on Russia have further sent more than a few shock waves thru the energy markets.

 

Finally, the OPEC+ nations have deliberately kept their production levels at, or close to, the levels negotiated by the Trump Administration  a couple of years ago.  This was done to rescue our own domestic oil producers staggered by the drop in oil prices.  If OPEC increased production (supply) prices would likely drop.  The Biden Administration is going to pay a call on the Saudis to see if hearts and minds might change on the matter of increased production.  Good luck with that.  If I was a member of an exceedingly profitable cartel I'd be disinclined.  Time will tell.

 

Enough said about the cost of crude.      

 

The second contributor to the recent rise in gasoline prices is growing demand as workers have returned to the office, resumed daily commutes and a weary population embraces a post-Covid world and is traveling.  We embarked-upon a marathon road trip in April and while I didn't particularly care for the high price of gasoline the Missus and I really didn't give a rat's ass.  We had places to go and people to see.  We also caught Covid - but I digress, again.

 

Just this past Friday I had to go to town to run an errand and I was witness to an extended wait to cross the four lane highway.  The northbound traffic was a solid and seemingly endless parade of campers, trailers, boats, kayaks, car-top carriers, bike racks and travelers sporting out-of-town vehicle tags. While some of you readers may have grumbled over the wait; I saw room taxes, vacation spending, restaurant meals and winery visits.  All of it principally fueled by an increased demand for gasoline.  Don't take my word for it though tourism trade on the peninsula continues to set new records for visitor taxes.

 

If you were to talk to the people over at AAA they would tell you that the post-Covid pent-up demand of American motorists continues to set record highs.  And with no slack in fuel consumption (get ready for this) demand is going to keep gasoline prices elevated.  

 

The question of the day is this: Have you curtailed your vehicular use as a consequence of the price at the pump?  I haven't.  And most of my contemporaries haven't either.  Welcome to the demand side of the economic equation.

 

The third (and smallest) contributor to rising prices is another of those nagging supply-chain issues.  Gasoline inventories are ample at the present moment - although refinery capacity struggles from time-to-time.  

 

Addressing one last bit of FB chicanery is that the price at the pump has nothing to do with canceling the permits for the Keystone XL pipeline.  The second Keystone pipeline. That project was conceived by a Canadian company to move low-grade tar sand crude to the gulf coast for export overseas.  And after more than a decade of controversy wasn't even slated for completion until sometime late in 2023.  As a general rule gasoline is not refined from tar sands due to the extraordinary costs.  Besides, the first Keystone pipeline has delivered over 3.3 billion barrels of crude oil since 2010.  It was never shut-down and continues to meet domestic and global energy needs.  To be clear, Biden energy policy might have a long term impact on energy prices.  Presidents can, and do, impact energy costs over the long term by means of policy.  Biden hasn't done much of anything anyway and when the GOP regains control of congress he's stuck.  For the present, current pricing is impacted principally by the global market price of crude and strong consumer demand. 

One final thought. There is a silver lining here if you look for it. Plenty of our countrymen work in the oil patch. A couple of years ago petroleum engineers and refinery workers were being furloughed in record numbers. Today domestic producers have recovered and are humming-along trying to keep-up with demand. That’s a good thing and a contributor to a healthy economy.  And for us retirees who belong to the investor class - energy and related shares are rocking the nest egg.

I don't want to minimize the reality that energy executives are loath to increase production (supply) while they are reaping record profits.  Their duty is to shareholders and employees first.  Markets drive pricing.  That's how business works in a capitalist economy. 

Raising a toast to the 2022 road trip wherever it may take you.

 

Bonus:

 

The Ukraine War, a New Flashpoint and the End of Europe's Energy Innocence