Soaring Prices at the Pump
Shocked Americans are now asking, “What is causing the soaring prices of gasoline?’ The answer is a complex combination of supply and demand pressures.
American drivers are now facing almost daily unwelcome surprises at their local gas stations. Today’s picture marks a historic and unsettling moment. The national average for a price of a gallon of gas has soared above $4.00, up a staggering 45 cents from a week ago. The national average for a gallon of gas is now the highest in US history, breaking a record that stood for 14 years.
Shocked Americans are now asking, “What is causing the soaring prices of gasoline?’ The answer is a complex combination of supply and demand pressures. During the pandemic major oil producers slashed supply as consumer demand shrank. However, as Covid-19 has begun to recede, relieved Americans are eagerly resuming their normal routines. As the stay-at-home lifestyle is beginning to end, more and more people are driving to work and planning to take postponed vacations.
The post-Covid 19 recovery is not the only factor responsible for soaring gasoline prices. On February 24th, Vladimir Putin ordered the Russian military to invade Ukraine. The war has sent shock waves reverberating through the global oil market. Russia is the world’s second largest producer of crude oil. Its oil industry accounts for about 12 percent of global crude exports.
Profits from oil and gas exports comprise about half of the Kremlin’s budget. They thus play a critical role in funding Putin’s war machine. The brutal invasion of Ukraine has sparked punitive NATO economic sanctions and a growing public outrage at the daily atrocities taking place in Ukraine. Oil traders, shipping companies, and financial institutions have already begun to shun Russian oil. A recent poll revealed that about 80 percent of the American public now strongly supports a ban on imported Russian oil regardless of how it will affect oil prices.
The combination of rising demand and tightening supply is pushing oil prices sharply up. It is important to remember that when oil becomes more expensive so do other goods and services. For example, farmers will be forced to spend more on diesel fuel to plow and harvest their crops. At the same time, trucking companies will be forced to spend more to transport farm products to the nation’s grocery stores. The soaring cost of fuel is playing a crucial role in causing inflation to rise above 7 percent, the highest in 40 years.
The impact of inflation will not be limited to the economy; it will also have significant expected and unexpected political impacts. In tomorrow’s commentary I will take a look back at the 1973 oil shock and compare it with the possible impacts of today’s oil shock. Stay tuned!
IMPORTANT UPDATE: President Biden will shortly announce a ban on Russian oil, gas, and coal. I’ll post updates as the story unfolds.
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