Why are gas prices skyrocketing in the US?

(Trends Wide Business) — There is suffering for American drivers as US gas prices soar to record highs.

Despite the fact that the US hardly uses Russian oil, the Russian invasion of Ukraine is still a major factor in the increase in fuel prices, among other reasons.

Confused? We guide you through the topic.

Most of Russia’s oil goes to Europe and Asia. But the key here is to think of oil supply globally, rather than the United States specifically. The world of raw materials is strongly interconnected, and the price of oil is determined through a global market. So what happens in one area of ​​the world can affect another.

The problem at hand is that Russia is one of the world’s largest suppliers of oil. In December, for example, Russia shipped nearly 8 million barrels of oil and other petroleum products to world markets, including 5 million barrels of crude oil used to make gasoline, among other items.

And yes, it’s true that very little of that Russian supply goes to the US: just 90,000 barrels of crude oil per day in December, according to the most recent US government statistics.

In 2021, by contrast, Europe got 60% of oil exports from Russia and 20% from China.

But remember that oil is bought and shipped around the world through a global commodity market. So in that sense, it doesn’t really matter who specifically is getting crushed by the loss of Russian oil, because the lower supply affects those global prices no matter what. And as we know, when there is less supply of an item in demand, prices go up.

For example, if Europe buys less Russian oil, it will have to replace it with oil from elsewhere, perhaps from the powerful Saudi-led Organization of the Petroleum Exporting Countries (OPEC). That surge in demand for OPEC oil will drive up crude prices. And guess who else buys hundreds of millions of barrels of OPEC oil?

You guessed it: the United States.

So why is there less Russian supply?

Initially, the West, including the US, exempted Russian oil and natural gas from the sanctions they imposed.

The Joe Biden administration changed course on Tuesday, banning imports of Russian oil and other fuels into the US, while the UK said it will phase out Russian oil imports by the end of the year. (The EU is in a more difficult situation here because it is so much more dependent on Russian oil.)

But the initial lack of formal bans didn’t really matter in terms of pricing anyway. There has been a de facto ban on Russian oil since the invasion began, with most of the country’s supply remaining unsold.

That’s because oil traders are incredibly nervous about touching things.

There is a lot of uncertainty about buying Russian oil, whether it’s about the ability to close deals given the sanctions on Russia’s banking system or about finding tankers willing to go to Russian ports amid shipping hazards in the area. war.

As a result, the main type of oil that Russia exports to Europe is being offered for sale at a deep discount because no one wants it. JPMorgan recently estimated that more than 4 million barrels a day of Russian oil has been shelved.

Therefore, investors are basically pricing oil as if the supply from Russia is not available at all. And again, less supply = higher prices.

Why can’t other countries pump more?

Covid-19 strikes again. No one wanted oil in general in the spring of 2020, when global stay-at-home instructions meant no one needed to refuel and go to the office. With demand falling, oil prices did too, even briefly trading negative.

In turn, OPEC+ sharply cut production to support prices. And they have kept production targets low ever since, only gradually increasing production again, even as demand for oil and gasoline recovered earlier than expected.

Guess who is part of OPEC+? Russia. So yes, OPEC+ is not rushing to the rescue. The Saudis have made it abundantly clear for months, even before the invasion, that the group does not plan to turn on oil taps any time soon.

However, that iron resolve may or may not be cracking. In a confusing development this week, the United Arab Emirates’ ambassador to Washington told Trends Wide that the country wants to increase oil production and will encourage its OPEC+ partners to do so. But later, the United Arab Emirates’ energy and infrastructure minister tweeted that the nation will stick to its OPEC+ deal and gradually ramp up production.

And then the Iraqi oil ministry said its leaders met and agreed that their OPEC+ partners should balance supply and demand to stabilize the market. At this point, who knows.

So why can’t US oil companies increase production?

Russia was the world’s second largest oil producer in 2021, pumping 9.7 million barrels per day, but the US is number 1 with 10.2 million. U.S. companies fail to meet those OPEC-style nationally mandated production targets. But US oil producers are unable or unwilling to fill the supply gap, even though they could make money given high prices and demand.

Here again, covid-19 strikes. Like many industries during the pandemic, oil producers are struggling to find specialized staff and equipment. Meanwhile, US oil companies are still smarting from that big oil slump in 2020, which triggered a wave of bankruptcies. The performance of the shares of major oil companies has also lagged behind the broader market. And as manufacturers of fossil fuels, they fear that future environmental policies could hurt future demand for oil.

All of the above highlights how oil and gas prices are linked to geopolitical events, the pandemic, drilling logistics and much more. And it adds to average US gasoline prices that are above $4.33 a gallon as of Friday.

In short, it’s all a simple case of supply and demand. But of course it’s never really that simple.

Chris Isidore and Matt Egan of Trends Wide Business contributed to this report.