If you were hoping for much cheaper gas soon, I have bad news: prices probably won’t drop much for at least a few months.
The causes of more expensive gas will likely be with us for some time. After pushing US prices over $4 a gallon, Russia’s war in Ukraine continues with no clear end in sight. So far, growers seem unwilling or unable to pump in enough supplies to fill the void caused by the war.
When I asked if there were any good short-term solutions, Tom Kloza, global head of energy analysis at the Oil Price Information Service, said simply, “No.”
For Americans, the immediate effect is that life will simply cost more. We will pay more when we fill up our gas tanks or pay energy bills over the next few weeks or months. The price of many other goods will rise, because so many things – food, iPhones, PlayStations, cars – have to be transported at one time or another by a truck, boat or plane burning fossil fuels.
Rising fuel prices also have wider consequences. A push to drill for more oil and natural gas, or to more aggressively pursue alternative energy sources, could affect climate change (in a good or bad way). A public angry at the cost of living might protest or spurn politicians in power. In the United States and other countries helping Ukraine, people might start to wonder if their support is worth gasoline and other more expensive goods.
Looking back on the Covid pandemic, many of us wanted – and expected – some relief after two terrible years. Rising gasoline prices and broader inflationary trends run counter to this, as if we were simply trading one crisis for another. And just like with the pandemic, there is no clear end in sight.
Producers vs low prices
At the start of the pandemic, demand for fuel plummeted as people stayed home. Once much of the world reopened, demand returned.
But supply has not kept pace, just as strained supply lines have driven up food prices and hampered the movement of cars, electronics and other goods. By turning much of the world against a major oil and gas producer in Russia, the war in Ukraine has only aggravated supply problems.
Some of the supply issues are inherent in the design. OPEC Plus, a cartel of oil-producing nations that includes Russia, has worked to keep prices – and therefore profits – as high as possible by limiting supply. The cartel maintained its approach.
But it’s not just OPEC. U.S. oil companies have deliberately slowed production after a pair of recent fracking boom and bust cycles left them with overabundant supply and plummeting prices. “We have the third boom, and these leaders don’t want to have the third bust,” Kloza said.
All of this leaves few good short-term solutions. Even if public pressure or a tight market eventually drives producers to drill more, new production can take months to start, especially due to labor and supply shortages. And even if U.S. producers step up, OPEC Plus might decide to cut spending — to keep prices high.
Other potential solutions that lawmakers have mentioned or adopted, such as a gas tax exemption or direct cash relief, could make inflation worse by putting more money in people’s pockets and keeping the high demand without necessarily increasing supply. “We’re not in a position to help households right now because that would lead to more inflation,” Harvard economist Jason Furman told me.
Meanwhile, some pundits have suggested that the best chance of a rapid drop in gasoline prices is an outcome no one wants: a new variant of Covid or a recession that cripples the economy and demand.
A cascading problem
Gas prices tend to attract disproportionate attention to their actual economic impact, Furman said.
One reason for that: the cost of gas is incredibly transparent, displayed on giant billboards across the country. Visibility can make rising gasoline prices a symbol of broader inflationary trends.
Rachel Ziemba, an energy expert at the Center for a New American Security, said she fears rising gas prices could cause social and political instability. Around the world, inflation has already caused protests and even riots. Rising gasoline prices, in particular, have historically led to lower presidential approval ratings as voters blame those responsible for inflation and poor economic conditions.
Some experts worry that rising gas prices could end up hurting Western resolve against Russia, if Americans and Europeans start to question whether supporting Ukraine is worth it. Recent polls suggest the public is willing to make sacrifices for the war effort, but polls also show growing dissatisfaction with inflation.
Thus, the consequences of rising gasoline prices are not only on your wallet, but also possibly geopolitical.
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