Pain at the Pump

$4? $4.50? $5? It may seem like the prices you’re seeing at the gas pump are going up and down daily, leaving you to wonder how much you’ll pay next time you fill up. But one thing seems certain – that tankful will cost more than it used to.

Our colleagues in Goldman Sachs Asset Management who study these things think high gas prices aren’t just today’s problem; they could affect our economic and environmental future for years or even decades to come. 

But before we talk about effects, let’s dive into causes. What made gas prices go so high? It’s not a simple story. 

Oil’s wild ride 

Like so many stories these days, this one begins with Covid.

In early 2020, as the pandemic spread, Americans (and the rest of the world) went into hibernation mode, sticking close to home and dramatically reducing our travel. As a result, gasoline demand plummeted to its lowest level in more than 25 years. 

To keep prices from tumbling with demand, OPEC (Organization of the Petroleum Exporting Countries) tried reducing their production of crude oil – the raw material of gasoline. But a few holdout countries continued to produce oil and flooded the world markets. With too much supply and too little demand, prices tanked. 

So, imagine being an oil producer facing the shocking possibility of having to pay people to take your product off your hands. That nightmare came true in April 2020, less than two months into the pandemic. The spot price (the current marketplace price at which a commodity can be sold for immediate delivery) of West Texas Intermediate crude oil – the US benchmark for oil prices – briefly dropped to minus $40 a barrel. 

Startled industry leaders reacted dramatically. They cancelled investments in new oil supply and even cut off some existing wells, thinking demand would never recover. (Which, given the global shift in focus to green energy, is what they’d been expecting for some time.) 

But demand did recover — very quickly. In April, global oil consumption dropped to 70% of pre-pandemic levels. But by summer, it was back to 90% of normal. First, we ordered more essentials online and drove the demand for gas to power delivery trucks up. Then, we started travelling again, fueling up cars and airplanes.  

But cautious producers kept the taps tightened, and supply shortages pushed crude oil prices to a seven-year high by Halloween 2021. 

Where we are now

Fast forward to spring 2022. Green energy hasn’t reached the point where it can supply all our needs. And oil producers are just starting to spend money on production again after seven long years of underinvestment. But they can’t increase supply overnight. Meanwhile:

• Demand for oil is even higher as the pandemic seems to be loosening its grip in many places. 
• Russia, one of the world’s biggest crude producers, is being penalized for its invasion of Ukraine by sanctions that are reducing its exports (Russian oil production accounts for about 10% of the world’s supply). 
• Random events, like storm damage to a vital Black Sea export terminal in March, are worsening pre-existing supply chain problems.

Limited supply, high demand and plenty of uncertainty. It’s no wonder it’s hard to know what will happen to prices at the pump from here.

The effects of gas prices on your pocket, the global economy and green energy transition

You can see that the high price of gas is part of a bigger picture. So, let’s look at our colleagues’ take on how high gas prices and their contributing factors could impact us in the future.

The economy:

1. High fuel costs contribute to inflation and the potential for a US recession, although recession odds remain fairly low. 
2. But if fuel prices stay high long enough, people may eventually have to choose between non-essential driving/travel and other needs or wants. Demand could drop, and then we could see prices fall at the pump. 

The energy transition:

1. Producers have had to return to traditional energy sources (like oil and coal) to make up for supply shortfalls. This is a short-term setback for decarbonization. 
2. On the other hand, today’s shortage has illuminated the global dependency on traditional energy sources. This could speed up the move to clean and independent energy sources like solar or wind.