- Gas prices in the US have hit a seven-year high.
- Demand has increased as the economy reopened and Americans have begun driving more.
- Meanwhile, supply has been constrained because of lower US production and OPEC decisions.
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Americans are once again feeling pain at the gas pump, and it’s because of a classic clash between rising demand and constrained supply.
An October report from AAA found that gas prices across the US hit their highest average levels since 2014 higher than they’ve been at any point since 2014.
It’s gotten even worse since then. Data from the US Energy Information Administration, which found gas prices rising throughout 2021, hitting levels not seen since the middle of the last decade. Prices continued to spike throughout October, hitting an average of $US3.40 ($AU5) a gallon on November 22:
The reasons for the price spike are textbook supply and demand from an economics textbook: Americans have gotten back to driving more this summer as the pandemic has moderated, and a combination of domestic supply interruptions and trouble in energy markets overseas have made crude oil more expensive.
Demand is up as Americans take to the road again
As with so many other aspects of everyday life, the COVID-19 pandemic radically changed how Americans travel. Lockdowns and the uncontrolled early spread of the virus led to canceled travel and a sharp reduction in commutes.
By summer 2021, however, Americans were back on the road. The number of vehicle miles traveled measured by the Federal Highway Administration plummeted in spring 2020, but in the last few months, highway traffic was back up to what would normally be seen in midsummer:
That increase in the amount of driving Americans are doing also means an increase in demand for fuel for cars.
US oil production and refining haven't kept up
In addition to that ramp-up in demand, there have been some big supply constraints as well.
The Energy Information Administration noted in mid-September that Hurricane Ida shut down a large swath of the US's oil drilling and refining capacity in the Gulf of Mexico in late August.
While rigs and refineries have quickly come back online since, crude oil inventories remain low, suggesting an ongoing lack of supply. EIA wrote that as of late September, oil stored at Cushing, Oklahoma, one of the main crude depots in the US, was down 40% from the start of the year.
Other EIA data shows that crude oil inventories across the country remain subdued:
A crunch in domestic oil supply and stockpiles coupled with a rise in demand leads to higher gas prices.
Energy markets around the world are in a crunch
In addition to domestic oil supply slowing down, oil and energy markets overseas also aren't helping matters on the supply front.
OPEC and other major oil-exporting countries have repeatedly agreed to only modest increases in production, despite oil consumers like the US and India pushing for higher exports, according to CNBC. The cartel most recently agreed to increase production by just 400,000 barrels per day in December, after President Joe Biden directly called for more production to ease rising prices. But it's a delicate balance, as shown by some cartel members' response to Biden and other world leaders tapping their strategic oil reserves: a reported pause in ramping up production.
It also shows how the cartel of oil exporters still holds a huge amount of power in global oil markets, even as the US has vastly increased production over the last decade and countries around the world begin the process of moving toward greener energy sources.
Broader energy markets have been facing supply shortages as well. European natural gas and electricity prices have skyrocketed, and traders expect higher oil and other energy prices for months to come. Russia, a key provider of natural gas to the EU, has held back on increased deliveries to the West, keeping prices volatile and high.
Put together surging demand from the US reopening with supply crunches both domestic and global, and it should be no surprise that gas prices are spiking.