Gasoline prices hit their highest level in eight years – here’s what’s driving the spike
U.S. gasoline prices hit their highest level in eight years as the price of crude oil rises, boosted by worries about geopolitical tensions in Eastern Europe.
The average price of a gallon of gasoline hit $3.47 on Wednesday, according to AAA, a jump of eight cents from the previous week. Gas prices this week are at their highest since October 2014, according to the US Department of Energy.
While gasoline prices typically fall in the first few months of the year as Americans wait out the cold indoors, this year has been different. Oil traders, worried about ongoing tensions between Russia and Ukraine, pushed the price of crude oil to over $90 a barrel.
“It hasn’t been driven by demand, but by supply, and recently we’ve seen crude oil prices move based on geopolitics. Many hypothetical scenarios: what if Russia invaded Ukraine and that we owe the sanctions?” Tom Kloza, global head of energy analysis for the Oil Price Information Service, told CBS MoneyWatch.
Russia produced more than a tenth of the world’s oil in 2020 – a significant share that would be disrupted by military conflict or sanctions threatened by the United States and its allies.
While the price of Brent crude oil, the international benchmark, has fallen since the start of the week, it was at $91 on Wednesday, 50% higher than it was at the start of last summer.
“Higher oil prices will eventually lead to higher pump prices,” said AAA spokesman Andrew Gross.
“When oil gets more expensive, it’s immediately reflected at the pump, but when the price of oil goes down, it seems like it takes forever for the price of gasoline to follow,” he added.
About half of the cost of gasoline comes from the price of crude oil, according to the Energy Information Administration. The rest is made up of the cost of refining, transportation, and federal and state taxes.
Production and refining
Oil-producing countries have slowly increased production, but global oil production is still below pre-pandemic levels and lags consumption.
U.S. drivers are also being impacted by refinery shutdowns, OPIS’ Kloza said. Since last year, hurricanes along the Gulf Coast as well as Shell’s decision to close a major refinery near New Orleans have reduced the country’s refining capacity by around 3%. “It’s enough to make a difference,” he said.
Next year, several major refineries are expected to open around the world, but until then oil prices are likely to continue to rise, analysts say. Some Wall Street banks expect crude prices to hit $120 a barrel, which would break all-time highs.
“This year, if I had to bet on it, I’d bet we’d see the highest average gas price for the country that we’ve ever seen, but that’s not going to represent the new normal,” Kloza said. The record average gas price in the United States is $4.11 per gallon, set in July 2008.
What can the government do?
Several Democratic senators have called for a federal gasoline tax break for the rest of the year, which would save motorists about 18.5 cents a gallon. States from Washington to Rhode Island have considered similar measures with their local taxes.
The Biden administration is also in talks with other countries to boost oil production or open up oil reserves, potentially repeating a November release of the oil emergency fund that temporarily blunted gasoline prices. Beyond that, the government’s options are limited, AAA’s Gross said.
“There aren’t many tools that any administration, whether Republican or Democratic, can [use]simply because a lot of what we pay at the pump is tied to the price of oil,” he said. “It shows the mess we are in because we are so dependent on fossil fuels.