WHY SO MUCH PAIN AT THE GAS PUMP?
…It takes months to start up a new oil rig for
crude production
It’s also the cause for the inflation of
virtually everything in the stores
Why did the price of gasoline increase over
40%?
It’s just a simple case of the “law of
supply and demand.”
When the corona virus shut-down the whole world in the Spring of 2020, the global demand for oil plunged, to the point where the cost of a barrel oil briefly dipped below zero dollars.
U.S. oil companies were sitting on brimming
tanks of crude oil that they could not sell.
So they slashed their gas production as a response.
Then, as Americans returned to work and
travel in large numbers last year, demand snowballed faster than any oil
producers had anticipated.
“They were severely behind the curve,” said oil-market analysts, Patrick DeHaan.
In February, 2020, domestic oil fields were
producing nearly 13 million barrels of crude daily. However, this February, the output was 11.3
million barrels.
That same month, Russia invaded Ukraine, and the global supply took another hit.
We must remember that Russia is one of the
largest oil producers and the second largest exporter of crude oil, after Saudi
Arabia.
But when the Western nations hit Moscow with
economic sanctions to punish Russia for waging war on Ukraine, Russian exports
plummeted. That sent global prices
toward the sky.
Because oil is traded on a global market, the reduction in supply raised the per-barrel price even for the countries that didn’t buy much oil from Russia. In fact, in the U.S., which banned all Russian energy imports last March, Russian oil made up less than 8% of the total. While Russia has found new buyers, the price of crude is now at $120 per barrel. That is nearly double what is was a year ago.
Now the solution may seem to just have the oil companies ramp up output. However, it’s definitely not that simple.
It’s not like turning on a spigot. Companies that had shut down their wells and laid off thousands of workers, they cant immediately pick up where they left off, so any effort to boost production now, won’t affect prices in the near term.
Starting up an oil rig takes six to eight months. And there’s another problem. The reluctance within the industry to invest in expanding production, especially with their current large profits from the price increases across the world.
Also, with the U.S. shifting away from fossil fuels and toward renewable energy and more highly efficient vehicles, the long-term profits don’t look like a safe bet for the oil companies. “Even though they see high prices today” said Christopher Knittel, an energy economist at MIT, “they’re afraid that prices are going to tank over the life of any new wells.”
As a result, oil companies are feeling pressure from Wall Street to use profits to reward shareholders instead of investing in new production. Even if production spiked tomorrow, all that oil couldn’t quickly be turned into gasoline.
The reason?
The U.S. lacks oil refineries.
Just since 2019,the U.S. has lost more than 5% of its refining capacity. That’s more than a million barrels a day. The money losing refineries have either been shuttered or refitted to produce biofuels. And that trend has been mirrored over the rest of the world which has also lost its capacity for producing more than 2 million barrels a day. Just like with drilling, gas producers are worried about drops in future demand and are reluctant to make investments required to expand capacity.
In addition, few refineries have been built over decades and none are planned for the future. In other words, no quick fixes for the problem.
Because the U.S. is so large, and many goods are trucked long-distances to the stores, this is the reason for the inflation of the cost of everything. The high price of diesel and gasoline has cause the increase of the cost of everything.
So there is the answer to why the cost of gasoline
has increased by 40%.
Copyright G. Ater 2022
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