Will gas prices go back down again?

I’m a bit weak on my econ -

Are gas prices just high in the USA or across the world now?

Will gas prices come down again? If so, what would be the reasons for them coming back down?

World energy prices are high pretty much everywhere right now, although the degree of severity depends (in places like Venezuela, for instance, gas is dirt cheap, but most other countries have seen the price in USD per gallon increase significantly in the past year). Check out Gasoline prices around the world, 06-Jun-2022 | GlobalPetrolPrices.com for interesting data.

As far as what would cause gas prices to decline, the short answers are an increase in supply or a decrease in demand. I’m not trying to be funny — for fuel, it really is that simple. In 2008, gas was around $4.00 per gallon, then shortly after that time innovations in unlocking energy supplies like fracking domestically (turning the US, out of nowhere, into a net energy exporter), caused energy prices to gravitate lower for the next decade-plus. There’s a supply story for you, although the details are admittedly a bit more complicated than that as it trickles down into gasoline production. But still, the main point is relevant.

Fast forward to the Covid crisis and everyone stayed home. Nobody bought gas, because nobody drove. Nobody flew, so jet fuel plummeted. Gas was a crazy low price in 2020-2021. That’s a demand story. And of course now, the Russia issue creates a narrative of shrinking supply, at exactly the same time as demand is increasing for fuel as we emerge from the pandemic. The perfect storm to create the current $5-6 dollars a gallon that many are seeing.

Unlike labor, there’s nothing necessarily that would cause gas price to be “sticky” and not go back to $2-3 per gallon if supply suddenly expanded or if demand dropped. That is certainly the case in the short run. In the long run, there is the observation that the world has a finite amount of fossil fuel, and so therefore, supply is ultimately constrained as a long run matter, even if we open up pockets of additional supply in the short run due to new technologies or new discoveries. But I personally believe that this long run petroleum constraint theory is hindered by the idea that humans are likely to come up with alternative energy sources that are institutionalized enough to replace fossil fuels in the long run.

If that scenario doesn’t actually pan out, then there are two roads that we could go down: 1) there are a lot more wars in the future as we fight for increasingly diminished remaining resources, or 2) humans will have to somehow collectively agree to consume vanishingly less energy per capita if population continues to increase, or decide on a policy of limiting population growth. Given that neither option is very attractive, I’m placing my faith in humans to innovate their way out of this in the long run. Fingers crossed!

For some good insights on these ideas and other related ideas, I recommend reading Vaclav Smil’s stuff.

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Well, I think we are all very lucky to have this kind of expertise here. Thanks!

@Destroyer_of_Worlds

I heard an Average Joe tell me today that gas prices are only high because oil companies elected to raise the prices, and that their costs to provide the goods haven’t gone up that much. He’s suggesting that an Exxon doesn’t need to suddenly pay more in shipping and labor to get the fuel to the consumer’s hands, so it’s just greed/pricing conspiracy.

His “proof” of this was that oil companies are making MORE in gross and net profits this year as a result.

This is the theory Joe Biden is pushing too (I saw some news headline about him writing a nasty letter to 7 oil companies blaming them for the prices).

How would you respond to that?

This is a classic case of “guy in a coffee shop” analysis from this person. It’s overly simplistic, black-and-white, and is the type of conclusion reached by people that are prone to superstition and conspiracy thinking. Unfortunately for Biden and the Democrats, even though they are largely and probably on the correct side of history in our current social and political upheavals, they are dead wrong with these accusations. The real bad guys right now are Putin and the faceless apparition of surging demand, not necessarily the CEOs of companies like Exxon. I get it, however…the Democrats are also being made the scapegoats for these price increases by people who believe that if Trump was still in office that somehow, magically, gas prices would be lower, so the Democrats need to politically shift the attention to another bogeyman readily understood and despised by the ordinary working class that can’t stand the “one percenters” — cigar-chomping energy company CEOs.

Of course, in reality, the analysis is complex. Are profits higher right now? Sure. But you can’t perfectly hedge your financial statements with high precision going out into the future not knowing how long those two “bad guys” I mentioned are still having a price impact. If it is true (and I don’t think it is true, at all) that the “costs of providing the goods haven’t gone up that much,” there is still the fact that we are in an environment where that could rapidly change. Building in some profitability now helps to cushion changes in the dynamic which could quickly push these companies into being temporarily unprofitable. After all, they exist in a highly competitive business. Very few people I know are die-hard users of one brand of gas over another, and would easily switch to another brand if it was merely a a cent or two cheaper per gallon.

Crude is up something like 340% since the depths of COVID. Supplies of all energy inputs are severely constrained by the war in Ukraine. As a result, the baked-in cost to hedge those energy inputs is increasingly unpredictable. Both skilled and unskilled labor costs are surging at a rate not seen in decades. Against this backdrop, would you price your end product with the expectation of stability, or would you build in a little cushion?

Of course, I expect I know your answer as a rational and analytical person. Whether you can convince this Average Joe of that is less certain.

The General’s Rule (sometimes known as the Admiral’s Rule):

Nothing is impossible for the person who doesn’t have to do it.

Hear, hear.

So in retard language, its the producers of the oil that are getting the vast majority of the benefit from the higher prices, correct?

true, but wouldn’t we have lower prices if Trump had been in office + Keystone pipeline had stayed on schedule?

I doubt it.

Maybe.

But it’s unlikely that it would have stayed on schedule.

And even if it did, it still might not have provided significantly more oil than we’re getting from Canada now without it.

And even if it did, the price of that oil might not be significantly lower than what we’re paying now.

And even if it were, there’s no guarantee that that would significantly lower the price of gasoline.

It’s actually the Saudi Arabians who did this. They messed with American producers hardcore for the last 5 years since 2016 and again in 2020. If you follow the mlp space you’ll see all the shady stuff they did. They are definitely in cahoots with the Russians too. America should teach both of them a lesson.