The average price of a gallon of regular unleaded gas in the U.S. recently hit $5, a record high (see Chart 1 below). This comes as U.S. consumer inflation in May reached its highest level in more than four decades, up 8.6% over one year (Chart 2). In fact, surging energy prices have been the biggest driver of inflation globally this year (Chart 3).
Chart 1 – Price of Gasoline
Chart 2 – CPI
Chart 3 – Underlying Categories within CPI
Demand for oil and gas plummeted during the pandemic-related shutdown in 2020. This caused many energy-producing companies to cut back on investments in production, or halt completely. The surprisingly fast economic recovery caught many of these companies unprepared to grow production quickly enough to meet the rebounding demand. This drove prices up and depleted oil reserves.
Russia’s invasion of Ukraine hasn’t helped. Prior to the war, Russia was the world’s largest oil and gas exporter, and sanctions on those exports have significantly impacted the market for crude oil.
While higher crude oil prices broadly impact the cost of energy, the main issue behind the sudden spike in gas prices is the lack of global refining capacity. The shortage of fuel-producing facilities that can transform oil into gasoline and/or diesel has pushed the price of both to record levels (Chart 4).
Chart 4 – Price Change in Oil vs Change in Production
Between the lines:
Prices for energy jumped 34.6% from a year earlier
Average price of a gallon of gasoline nationally is $5+
Summer is the busiest driving season, putting increasing pressure on prices
Demand for diesel, the primary fuel for the trucking industry and other industrial users, has also soared as economic activity has picked up
Analysts are calling for oil prices to top $150 per barrel and for U.S. gasoline prices to hit $6 per gallon by the end of the summer
Oil companies are seeing record profits, but mostly returning it to investors instead of drilling more wells/increasing production facilities
Prices for gas will continue to get more expensive if demand keeps growing, and supply continues to be restrained. For broadly diversified investors, these costs will somewhat be offset by exposure to oil and gas companies in their portfolios. For the foreseeable future, energy prices will continue to be a primary driver of inflationary pressures.
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