Fuel prices keeps on rising every single day. And it looks like that this trend will continue for the foreseeable days, weeks and even months to come.
So if you are a car enthusiast or a typical businessman that happens to thrive alongside your ride, then you are probably affected by this significant increase in fuel prices.
In this post, I’ll give you my thoughts (though you probably already know some of the reasons) on why gas prices are at all time high right now. Read on.
Causes of Fuel Prices to Increase?
As you know, I am not an economist nor a market guru, so don’t expect any broad terms here with regards to this topic. I’ll just express my opinion on the matter, as a casual gearhead of course.
Okay, like many other products, fuel prices are affected by “supply and demand”.
If a certain product (in this case is fuel) have an oversupply meaning there’s more fuel on the market than people are consuming, it forces the price to go down.
In contrary, if there’s limited supply in the market due to increased demand, then fuel prices are likely to increase.
This is the simple market rule that all of us are governed with. However, there are also other factors that can affect the price to go up or down. And in our current situation, the fuel prices just keeps on rising with less price roll back in the last couple of months.
So what are the possible reasons for this? Let me share to you my thoughts.
Sanctions on Russia’s Crude Oil Exports Impacts Global Market
Gas prices are linked to the cost of crude oil, which they are refined from. And if you don’t know yet, Russia is the biggest exporter of crude oil and natural gas on the planet. And with its invasion of Ukraine, US president Joe Biden banned all Russian oil imports [1].
The US doesn’t import a lot of crude oil from Russia but the sanctions have significant effects on fuel prices all over the world as oil is traded globally.
Many countries are dependent on Russian oil and gas. So even though the US don’t import a lot of gas, the sanctions makes it difficult for Russian oil to flow to the global market scene and the result is fuel price increase.
Post-Pandemic Demand for Fuel
If we look back at the start of the pandemic in March 2020, most people worldwide are forced to stay at home for months due to nationwide lockdowns.
Most industries were shutdown even the airlines, and especially the driving public. This cause the demand for fuel to significantly plummet, which is also the reason why fuel prices also plunge during that period [2].
But since the quarter of last year, most of the world’s economy has recovered due to the availability of vaccines. This led people to live a more normal life as we feel safer.
This also increases the demand for fuel as people started to travel again and do more errands using their vehicles. By March 2021 where the pandemic is in its lowest, fuel prices has increased approximately 45% from the onset of the pandemic.
So yeah, gas prices are truly affected by the supply and demand law.
Oil Production Cuts
When did the oil producing countries cut their production? In the pandemic of course! As mentioned above, Russia is one of the biggest oil producers (aside from OPEC nations) in the world and cuts their production in 2020 by 10 million barrels [3]. That is about 10% of the global oil supply.
In recent months where the effects of pandemic are minimal and the world economy has recovered, OPEC nations was slow to fasten up their oil production.
Yup, they are having a hard time to meet the public’s demand due to slow production and delays. Again, the higher the demand with limited supply results to higher fuel prices.
Will Fuel Prices Continue to Go Up?
I don’t think that we are at the highest price point right now, and I believe the price will continue to increase in the coming months.
Even though oil prices will reach its highest potential price in history, it will go back to its normal price once oil production nations can meet the fuel demand consumption of the public. And of course, expect the fuel prices to reduce dramatically once the war in Ukraine is over.
The only question is WHEN?
References:
CBS News
https://www.cbsnews.com/live-updates/biden-russia-oil-gas-ban-imports-ukraine/
Petroleum & Other Liquids
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m
CBS News
https://www.cbsnews.com/news/opec-deal-oil-production-cut-trump-stock-prices/
