Early in March 2022, gas prices at the pump hit record highs in the U.S., and that’s putting more financial burden on American households already struggling with soaring food prices and student loan debt. President Joe Biden plans to do something about the problem. When will gas prices go back down?
According to the American Automobile Association (AAA), the average gas price in the U.S. on April 1, 2022, was $4.215 per gallon. While prices have come off the all-time highs that they hit earlier in March, they're still considerably higher than the corresponding period in 2021. The previous nationwide all-time average high of $4.11 was reached in 2008.
What’s causing the high gas prices?
A confluence of factors is behind soaring gas prices. Gas demand started to rise in 2021 when more people started traveling after getting vaccinated against COVID-19. As a result, the demand for fuel increased.
At the same time, OPEC+ was disciplined with the supply and didn't increase production much despite pressure from major oil importers like China, India, and the U.S. In 2021, global crude oil prices hit their highest level since 2014 and $100 per barrel crude oil price started to look like a real possibility.
The high gas prices mean Americans are spending more to fuel their cars. The cost of transporting goods in trucks across the country has also increased, resulting in many consumer products being more expensive. Airlines have also seen an increase in jet fuel prices, and travelers have to pay more for their flights.
Crude oil prices spiked after Russia's invasion of Ukraine.
Global crude oil prices, and by its extension gas prices in the U.S., were looking strong towards the beginning of 2022. However, prices went through the roof after Russia invaded Ukraine. In response, western countries imposed punitive sanctions on Russia.
Some of the sanctions targeted Russian oil and gas imports and countries like the U.S., U.K, and Canada stopped importing oil from Russia. Russia is the third-largest crude oil producer globally and produces around 11 million barrels of oil every day.
The country's daily exports before the Ukraine invasion were between 5 million and 6 million barrels of oil. The Ukraine-Russia war and the following sanctions raised fears that the global crude oil supply might get disrupted.
To make things worse, OPEC hasn't increased its production much and is sticking with the plan for a moderate production hike. At a time when there's concern over oil supply from Russia and demand has rebounded, OPEC's production hike wouldn't move the needle much for the market.
When will gas prices go back down?
High gas prices are exacerbating inflation, and Biden has said that addressing inflation is his top priority. Reducing energy costs will help bring down inflation.
Biden announced a historical oil reserve release.
Biden has announced an unprecedented oil release from the country's strategic oil reserves. The U.S. will release 1 million barrels of oil every day from the reserves over the next six months. After withdrawing the 180 million barrels from the reserve, the country's reserve will fall below 400 million barrels, which would be the lowest since 1984.
The U.S. released oil from the strategic reserve in 2021 in a synchronized move with other countries like India, South Korea, Japan, and China. However, the volume of oil released back then wasn't enough to impact prices and it was more of a signal to OPEC to increase oil production.
Biden's recent announcement should help bring down oil prices. Also, India, which is the third-largest crude oil consumer and importer, has been buying more oil from Russia. The country hasn't been a major importer of Russian oil but it increased the volume after Russia offered a massive discount. Given the crude oil price environment, even China might buy more discounted oil from Russia.
Finally, the global crude oil demand growth should also taper down since concerns about global growth have resurfaced. China is facing a COVID-19 outbreak and has resorted to strict lockdowns. Possible demand destruction amid slowing growth, incremental supplies from the OPEC, more countries buying Russian oil, and oil reserves released by the U.S. should help bring down crude oil prices.
The fall in crude oil prices would eventually be reflected in gas prices. While some states like Georgia have suspended gas tax, more states might suspend the gas tax and provide relief to consumers. The Biden administration might also have to suspend or lower the federal gas tax if prices don't come down despite other efforts.
As for consumers, gas prices should come down slightly in April. As the year progresses, we should see crude oil and gas prices come down even more from these levels.