Here’s where gas prices are headed (for now) and why
This week the price dropped to $76.73 a barrel
MIAMI, FL – APRIL 09: Customers use a gas station as reports indicate that the price of gasoline continues to rise on April 9, 2018 in Miami, Florida. AAA forecasts the national gas price average will be as much as $2.70/gallon this spring and summer. (Photo by Joe Raedle/Getty Images)
(*This story was updated at 12:48 p.m. on Monday, May 1, 2023 to correctly reflect the number of barrels of crude oil the U.S. produced daily in January. It was 12.5 million barrels)
The U.S. produced 12.5 million barrels of crude oil a day in January,
Higher temperatures. Higher gas prices.
Drivers across the country have seen that seasonal given play out in recent weeks. The national average for a gallon of regular gas is $3.64 on April 26, up 21 cents over the previous month, according to AAA.
The good news is that gas is 49 cents below where it was on April 26 of last year, and more than a dollar below last year’s high of $5.02 a gallon, which it reached in June. And right now, economists aren’t expecting prices to surge this summer, though some slight increases are still expected.
“I do expect prices to move higher through the year but nothing dramatic …,” said John LaForge, head of global real asset strategy at Wells Fargo Investment Institute. “As far as 2023, there really isn’t much to do. We’re heading into the driving season … I don’t expect to see gasoline move up by a dollar. I think it’ll be 10 cents, 20 cents. It’s not going to be any fun. I don’t think we’re gonna get this big, big move. In the end, the answer really is conservation and just don’t drive as much.”
Of course, gasoline prices differ widely from state to state, with consumers paying an average $4.70 a gallon for regular in Arizona and an average $3.23 in Louisiana on April 26.
So why the fluctuation from one state to the other? One month to another and even year over year?
Here is a look at the factors that play into prices.
Due to environmental regulations, gas stations are changing gasoline to a summer blend, which has lower vapor pressure (making it cleaner) but costs more because it requires more refining. It could range from five cents more to 20 cents more depending on the region of the country you’re buying gas in, said Andrew Gross, spokesperson for AAA.
“In some places [the switch] already happened and in other places, like in the Northeast, it continues,” he said. “Retailers have until the end of May where they’re able to keep selling the winter blend because they’re allowed to sell what’s still in their tank essentially.”
And some New England states and California have stricter regulations than the EPA, making their gas pricier still.
Other circumstances influencing gas prices include what the market will bear at that particular gas station, proximity to refineries, and hurricane season lasting longer than it used to, which can disrupt refineries, Gross said.
And yes, we’re driving more in the summer and demand is a big factor, though not the biggest.
The big driver: Oil
The price of gasoline you pay at your local station is greatly influenced by the price of crude oil. According to the U.S. Energy Information Administration (EIA) April report, the price of crude oil makes up 57% of the retail price of gasoline, followed by refining, taxes and distribution and marketing.
OPEC producers’ announcement earlier this month that they would be cutting oil production by 1.2 million barrels a day pushed the price of crude oil over $80 a barrel. Russia and Saudi Arabia are making the highest cuts in production at 500,000 barrels per day, starting in May. The United Arab Emirates, Kuwait, Iraq, Kazakhstan, Algeria, Oman, and Gabon are also reducing production.
“The oil market is just like the stock market. It’s very headline driven and any kind of bad news will make it freak out and that’s what it did,” said Andrew Gross, spokesperson for AAA. “The price of oil immediately shot up to like $85 a barrel (after the OPEC announcement). Well, since then, it’s really had a hard time keeping its nose above $80. If it stays north of $80, that puts a lot of upward pressure on the price of gasoline. If it drops below $80, a lot of that pressure is removed.”
This week the price dropped to $76.73 a barrel.
OPEC reductions also drove up the price of oil last year, leading to a high of $123 a barrel. But other factors also weighed on the price at the pump, including the start of the war in Ukraine, a decrease in production of domestic oil during the pandemic and a surge in demand from a nation ready to get back to business after COVID restrictions eased. And while the war is ongoing, production both globally and domestically is expected to reach new records, according to the EIA.
Let’s not forget profits
Oil companies reported record profits in 2022, partly buoyed by Russia’s invasion of Ukraine:
- Exxon Mobil: $56 billion
- Shell: $40 billion
- Total Energies: $36.2 billion
- Chevron: $35.5 billion
- BP: $28 billion
- ConocoPhillips: $18.7 billion
In October, President Joe Biden said he would work with Congress to force companies to “stop war profiteering, meet their responsibilities to this country, give the American people a break and still do very well.” He suggested a higher tax on their excess profits and other possible restrictions, options that were not expected to go anywhere in the Republican-led House.
Instead of a windfall tax on profits, Biden’s budget calls for increasing the tax on stock buybacks from 1% to 4%, a move aimed in part at oil companies that had reported on earnings calls that they would buy back shares of their own stocks rather than invest in more production.
However, U.S. Sen. Sheldon Whitehouse, D-RI, did reintroduce a bill in February that would carry out a per barrel quarterly tax of oil companies that produce or import 300,000 barrels of oil a day or more and would allow taxpayers to receive rebates of hundreds of dollars. U.S. Rep. Ro Khanna, D-CA, introduced the bill in the House.
Can the U.S. do anything else to keep prices down?
Biden took action in 2022 to lower high gas prices by selling 180 million barrels of oil from the Strategic Petroleum Reserve, a move that received criticism from Republicans.
“After June, the prices began to drift lower. The administration helped out with tapping the Strategic Petroleum Reserve, which really played a key, a key role in that,” Gross said. “It could stop that trend of higher prices. Now can you say that it helped lower prices by 20 cents or 10? We will never be able to tell what it did but we know that it sort of stopped the momentum.”
It’s unlikely the Biden administration would take that measure again. The Strategic Petroleum Reserve is at its lowest level in decades.
But right now it’s not expected to be needed. The EIA originally estimated that gas prices would increase to a national average of $3.53 a gallon in April and forecast prices at $3.45 a gallon through August. But it hedged as well, saying: “Additional OPEC production cuts, refinery outages, or changes in underlying economic conditions could all contribute to changes in gasoline supply or demand and, therefore, change the gasoline retail price outlook.”
Higher domestic production will help. The U.S. produced 12.5 million barrels of crude oil a day in January, a 9.6% increase over the year prior.
If demand changed, prices could also level off, but a lot would need to shift in the economy for that to happen, said Kevin L. Kliesen, an economist at the Federal Reserve Bank of St. Louis. Kliesen spoke to States Newsroom on April 19, before the Federal Open Market Committee’s media blackout period. Kliesen said demand could change significantly if the economy slows, but until the tight labor market changes, he expects to see some increase in gas prices this summer.
“ …The unemployment rate is 3.5% so as long as the labor market continues to be quite well, that’s going to hold up consumer spending and incomes,” he said. “That’s going to tend to increase the demand for energy and things like that, so people should expect a modest upward drift in gasoline prices.”
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