Gasoline is nearing an average $5 per gallon across the U.S., but while consumers are feeling the pain, prices are not yet at a level that would tip the economy into a recession, economists said.
Where that breaking point price lies is unclear. Some suggest it would probably not be just gasoline alone that would send the economy into a tailspin. That said, economists say a recession is indeed possible if fuel prices rise to an even higher level and stay there for an extended period of time.
Oil prices shall remain high for the near future unless a major geopolitical or political breakthrough takes place.
In the upstream capex, more than 70% is replacement capex, therefore, not enough is being spent to replace depleted oil wells, and this restricts capacity. In 2014, at the same oil prices as today, capex was 3 times higher with the US!
Crude in the US Strategic Petroleum reserves fell to multi-year low as refiners ramped up production to pre-pandemic levels.
Russia’s Rosneft is holding back on signing new crude oil deals with two Indian state refiners as it has committed sales to other customers, implying either there is a supply shortage or the one is artificially created.
Skyrocketing gasoline prices come as many Americans are choosing to spend on things such as travel and entertainment. That determination to return to normal activities could be keeping gasoline demand higher than it might otherwise have been as prices rose.
Prior to 2022, the highest ever average recorded by AAA was $4.114 per gallon in July 2008. Average U.S. gas prices soared to a record high of $4.33 in March shortly after Russia invaded Ukraine, which caused crude oil prices to surge and threatened global supply.
After a two-month lull, gas prices have steadily risen since last month, setting record highs nearly every day. Crude oil benchmark West Texas Intermediate is $121.82 per barrel Thursday, up nearly 6% since last Wednesday when the Saudi-led OPEC+ alliance’s announced oil production increase failed to quell investors’ fears.
JPMorgan analysts expect gasoline could top out at a price of $6.20 per gallon by August, but other analysts expect the peak price to stay closer to $5.25 per gallon because drivers will likely cut back.
Patrick DeHaan, head of petroleum analysis at Gas Buddy, said driving demand was down from last year over the Memorial Day weekend, the start of summer driving season.
Meanwhile, Brent futures fell to $16 per barrel. Brent futures represent seaborne petroleum, with more storage options in tankers worldwide. However, Brent fell to its lowest price this century as the global pandemic caused crude oil demand to evaporate.
Since the April 2020 lows, WTI and Brent have moved steadily higher, closing 2021 at $75.21 and $77.78 per barrel, respectively. In 2022, prices soared after Russia invaded Ukraine. U.S. energy policy addressing climate change handed control of oil pricing to OPEC+, with production decisions now coming from Moscow and Riyadh, Saudi Arabia.
Crude oil became a political tool in 2022 as sanctions on Russia and Russian retaliation have made the oil market a geopolitical hot potato. After years of suffering from low prices because of rising U.S. shale production, the Saudis have gone along with the Russians for the bullish ride.
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