Why Are Gas Prices So High?

by William Huston, AIF®, AIFA® in FinancePublished on July 26, 2022

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Why Are Gas Prices So High?

Gas prices have been so high over the past few months. The condition now is even worse. Most people are aware of this.

The unfortunate thing is, when gas prices go up, the cost of transportation goes up and that leads to an increase in the rise of all commodities. Be it bread, construction materials or even diapers.

In June 2022, the average price of a gallon of gas in the U.S. is $5. Drivers continue to experience pain at the pump every time they go to fill up their tanks.

With inflation hitting a record high of about 9% in the U.S., gas prices are at levels that have rarely been witnessed in the past 50 years. Even during the energy crisis in the late 1970s, the situation was not as dire as it is now.

Again, you may ask, why are gas prices so high? Let’s dive deeper into it.

What Actually Determines The Price Of Gas

In comparison to last year, 2021 at a similar time, gas prices in the U.S. have risen by about 50%. Is the president to blame, or is it the pandemic, or the rising rate of inflation?

Here are the main factors that contribute to the cost of gas.

Crude oil Prices

The sharp spike in gas prices is as a result of the increase in crude oil prices. According to the Energy Information Administration, the cost of crude oil, the raw material that generates gasoline accounts for 60 percent of the price of a gallon of regular gas.

In 2021, it accounted for 52% and in April 2020, 25% - which was as a result of the pandemic. The decline in demand for fuel was caused by the lockdowns.

In 2021, the cost of a barrel of crude oil was about $70. In 2022, the cost has gone up to approximately $120 a barrel. High inflation and the Russia-Ukraine war are a ong the factors that have contributed to this.

Trading

The price that you end up paying for gas is heavily influenced by the trading activity that happens in the global market for oil and petroleum products. The global economy is run by the principle of supply and demand and when that equilibrium is disrupted, costs either increase or reduce.

Inflation

The high inflation rate in the U.S. which is now at about 9% has driven up the cost of gas prices. With more demand than supply, consumers have had to dig deeper in their pockets to afford a gallon of gas.

Russia-Ukraine War

Even before Russia invaded Ukraine, gas prices were still going up. However, the invasion has worsened the situation because of sanctions imposed by the European Union, United States and other major economies around the world. Keep in mind, Russia is one of the biggest oil exporters in the world.

In 2021, roughly 8% of crude oil imported to the U.S. came from Russia. Since the invasion happened, Russia has been exporting less oil due to the sanctions imposed by the major economies in the world. This has led to a decline in the global supply, which has in turn led tto gas prices going up.

Increased Travel

When the COVID-19 pandemic hit in 2020, for a period of time the cost of a barrel of oil dropped below zero and the storage tanks were completely full, due to low demand. This was caused by lockdowns that were imposed by governments.

In 2022, commuters and other travelers are back on the road and this has led to an increased demand for gas. It being the summer season now also doesn't help much as a lot of people are traveling for their vacations. It is projected by analysts that gas prices will hit $6+ starting August 2022.

For some, this will disrupt their summer plans. Others will start stacking up their money early so that they are able to afford such plans.

Oil Refineries

Another factor that's driving the cost of gas up in the U.S. is the crude oil refining process. In the past few years refineries have shut down faster than new ones that are being built. That means that the existing oil companies, which are working at nearly full capacity, have lower capacity to refine gasoline that will meet the demand in the market.

Has The Government Done Anything To Reduce Gas Prices?

Great question!

There are some things that the government has done, and there are other things that are still in the works.

Let's have a look at the remedies that have been implemented.

Gas Stimulus Stimulus and Rebate Check Programs

As one of the ongoing ways to help Americans deal with higher gas prices as a result of the pandemic and the war in Ukraine, 14 states have approved legislation to get tax rebates for their residents.

These States include California, Colorado, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, New Jersey, New Mexico, Minnesota, South Carolina and Virginia.

Emergency Oil Reserve

In November 2021, President Biden instructed the Department of Energy to release 50 million barrels of oil from the Strategic Petroleum Reserve to ease gas prices. This however did not help much.

In March 2022, the president again announced that 1 million barrels would be released per day, for 6 months from the Strategic Petroleum Reserve. This move also didn't seem to ease the situation.

With the sky high gas prices, Americans will have to continue to dig deeper in their pockets as it is not yet clear whether gas prices will reduce in the near future.

Are There Ways That I Can Save Money On Gas?

Yes there are!

Here are 5 great ways that you can do it effectively.

1. Use gas apps to find cheaper gas near you

You don't need to walk around every fueling station in search of a good deal. Just use apps like GasBuddy, Gas Guru and Waze to find the cheapest gas prices near you in real time.

2. Join and make use of gas reward and cash-back programs

If you already have a preferred place(s) where you like to shop or refill your gas, sign up for gas reward or cash-back programs there.

These programs will provide discounts for returning customers each time they refill their gas.

3. Limit your number of trips

Do you have errands that you can combine and tackle in one day? If yes, do that to save yourself some time and gas money.

4. Carpool with other people

If you can carpool with your friends while going to work, or the office or while dropping the kids off to school everyday, do that. It will save you some coins at the end of the day.

5. Rework Your Budget

Many of us have had to change up and tighten our budgets due to the high cost of living at the moment. Is it fun, no. But is it necessary, yes.

Whether it means reducing your wants or getting rid of some unnecessary items on your budget, do that until you feel like you have a solid budget that works for you.

In Conclusion

Living within your means during these tough economic times can go a long way in helping you make the best use of the resources that you have. If you would like to work with one of our qualified financial advisors in managing your finances, get in touch with us here.

Bay Street Capital Holdings

Bay Street Capital Holdings is an independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. They manage portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. Although many advisors may focus on maximizing returns, they place a higher priority on managing total risk and volatility.

Our founder, William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2021. In California, only two black-owned firms out of nineteen firms received this recognition. In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs. In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).