What’s Up With Energy and Where Gasoline Prices Could Be Headed

The State of Oil

It’s been an especially volatile year for energy markets, which falls in line with the general uncertainty impacting both Wall Street and Main Street. Oil prices in particular spiked in response to Russia’s invasion of Ukraine, as international benchmark Brent crude saw its price per barrel go over $100 for the first time since 2014.

At the same time, oil prices have come under pressure in recent weeks. This is due to macroeconomic factors including falling demand as a result of higher prices, and rising interest rates, which could tip the economy into a recession, further eroding demand. That said, there was a new development this week when Russia announced it would throttle its natural gas deliveries to Europe to just 20% capacity. Analysts say this could have a long term ripple effect on oil prices.

Substitutions, and Inflation

A trip to the grocery store offers a snapshot view of inflation in 2022. The gas needed to drive there and the prices on the shelves are elevated. In response, some shoppers have opted for cheaper store brands. This type of swap could be coming for Europe’s consumers on the energy front as well. Because Russia intends to cut natural gas deliveries, its price will rise due to constricted supply. That may cause a general shift to oil products, such as diesel, increasing demand for oil.

Digging into the numbers provides further context on how energy contributes to inflation. Crude oil’s price increases have caused gasoline to rise 60% over the past 12-months. Natural gas’ climb has contributed to a 13% jump in electricity prices.

Refinery Capacity

Analysis suggests US consumers may face elevated gas prices in the years to come. While prices have actually fallen off highs in recent weeks, the national average remains above $4.25 per gallon, which isn’t far off March’s record. Generally speaking, oil prices are in a tug-of-war between tight supply concerns and worry over a recession.

Industry experts warn the longer term concern is related to the United States’ declining refinery capacity. Refineries turn crude oil into gasoline and other petroleum products. Due to climate change and other factors, US fuel-producing capacity has fallen by around 5%, which translates to one million fewer barrels being refined per day. That trend suggests US consumers are likely to be griping about gasoline prices for years to come.

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