No relief in sight from rising gas prices

With average gasoline prices around $4.50 per gallon, stunned drivers may feel like they’re about to take a break. But gas prices seem likely to rise, perhaps above $5 on average, as Russian oil disappears from the market and producers struggle to keep up with demand.

“I expect it to get worse for consumers,” Occidental Petroleum CEO Vicki Hollub said on May 13. Online forum sponsored by the Federal Reserve Bank of Dallas. “Reserve capacity is at its lowest level in several decades. New production is not enough to meet demand. Oil will continue to stay at its high prices and gas prices will remain high as well.”

Americans who have heard that the nation is “energy independent” don’t understand why American producers can’t turn on the taps and lower prices. But “energy independence” is something of a legend. Oil and many other basic commodities are traded in global markets, with prices determined by supply and demand around the world. A supply or demand shock anywhere affects prices everywhere. And American prospectors have been excessively producing oil and natural gas for several years, effectively supporting lower pumping prices from 2015 through 2020 by losing hundreds of billions of dollars. Industry executives insist those days are over.

[Are you doing anything creative to cope with high gas prices? We’d love to hear about it.]

President Biden has allowed huge amounts of oil to be released from US reserves, and other countries have followed suit. By November, that could happen Add about 240 million barrels of oil to the global show. This is minuscule relative to total oil consumption, but the International Energy Agency notes it Crude prices fell by about $10 a barrel Where fresh oil began to hit the market.

However, supply is likely to become more tight, and demand could rise as China emerges from the widespread COVID-related lockdowns that have slashed economic activity there. That could cause prices to go up worse than we’ve seen so far this year. The embargo on Russian oil, after the invasion of Ukraine on February 24, is intermittent, for now, with countries like the United States, Canada and Australia cutting off Russian oil imports, but many other countries still buying Russian oil. Russia still earns about as much oil revenue as it did before its barbaric invasion, with some sales shifting to Asian customers.

The European Union is working on a ban on Russian oil by the end of the year, which could push prices up.

“We just saw the beginning of this oil supply shock,” Dallas Fed economist Lutz Killian said at the May 13 event. “This particular oil shock, if it occurs, could be more severe than other oil supply shocks in the past. There is every reason to be concerned about the inflationary impact of the invasion of Ukraine in the medium to long term.”

[Follow Rick Newman on Twitter or sign up for his newsletter.]

Saudi Arabia and the UAE are two countries that could easily pump more if they so chose. But they are not. In fact, the two countries’ OPEC alliance is pumping less oil than its latest goals require. Meanwhile, profits are accumulating. Saudi oil giant Saudi Aramco Just posted a huge quarterly profit of $40 billionBenefiting, like other oil companies, from prices that have nearly doubled in the past 12 months.

The United States could see a modest increase in oil production

Here in the US, there is likely to be a modest increase in oil production. Rig numbers are up and forecasters expect US production to rise by about 1 million barrels per day, to about 12 million. But that would still be less than a million barrels from the peak production, which occurred at the end of 2019, right before the spread of the COVID pandemic.

The US energy industry has been crushed during the coronavirus downturn, with oil prices falling so deeply that they briefly turned negative in 2020. This came after several years of overproduction. Companies go bankrupt, investors lose billions, workers leave the field, and the remaining producers focus on returning cash flow to investors rather than adding new capacity.

MIDLAND, TX - MARCH 12: Workers place a pipe in the ground on an oil drilling rig erected in the Permian Basin oil field on March 12, 2022 in Midland, Texas.  President Joe Biden has imposed an embargo on Russian oil, the world's third largest oil producer, which could mean oil producers in the Permian Basin will need to pump more oil to meet demand.  The Permian Basin is the largest petroleum producing basin in the United States.  (Photo by Joe Riddell/Getty Images)

Workers place a pipe in the ground at an oil well drilling rig erected in the Permian Basin oil field on March 12, 2022 in Midland, Texas. (Photo by Joe Riddell/Getty Images)

“The downturn has gone on for too long,” Cindy Taylor, CEO of Oil States International, said at the Fed’s event in Dallas. “We have permanently lost a lot of workers, and these jobs are high tech and demanding. I think we can go much higher than that. [on production] Faster, it will take some time and labor and supply chain challenges will be central to that. “

Biden and many Democrats are criticizing energy companies for enjoying rising profits while drivers struggle at the pump. Industry executives say their shareholders and investors deserve some returns after several tough years. They also argue that Biden’s focus on green energy scares investors and lenders because the permanent decline in the oil and gas industry is essentially US government policy.

“The management’s rhetoric isn’t helping in this situation,” Hollub said. “There is an effect now when you create an implicit position that you don’t want the oil and gas industry to grow again.”

Many energy investors have shortened the time frame for expected returns, forcing companies to spend more on higher dividend payouts and share buybacks and less on new capacity.

The biggest development that would lower prices would be a sort of solution to the Russo-Ukrainian war that has cemented Ukraine’s sovereignty while laying a path toward lifting sanctions on Russia. This appears unlikely any time soon, and mounting evidence of war crimes in Ukraine may make it difficult to lift sanctions as long as Russian President Vladimir Putin remains in power. However, if Putin goes away, it will be a great opportunity to end the war and begin to repair the damage done to global markets.

Meanwhile, oil and gasoline prices will be higher if the Chinese economy returns to normal, rather than reeling from mass coronavirus lockdowns. Eurasia Group says weak demand from China provides a “ceiling” for oil prices for now. But if China turns back with Russian oil dwindling, this could be the $5 gas formula.

In 2008, US oil prices were $145 a barrel, which would be $191 today, after adjusting for inflation. Gasoline prices were $4.11 a gallon, which would be $5.40 a gallon today. Although the gas could be painful at $4.50, historical data tells us that the dollar could rise more or less easily.

Putin can prevent that, but Biden probably can’t.

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on TwitterAnd InstagramAnd YoutubeAnd FacebookAnd FlipboardAnd LinkedIn

Leave a Comment