With the Memorial Day weekend approaching and summer right around the corner, this is the time of year that Americans have become accustomed to escalating prices at the gasoline pump. The steep increase last week to $70 a barrel for oil has pushed the average price of gasoline up toward $3 a gallon, the highest in over three years. The national average was around $2.90 at the end of last week, that is up 17 cents from expectations a month ago, and close to an increase of nearly 50 cents over last summer. Moreover, that has caused a bit of panic at the pump.
When it comes to the cost of gasoline, someone is always on the losing end. If the price is low, the oil companies struggle with fewer profits and disappointed shareholders, while the motorist is happy because they retain more of their disposable income. If the prices are high, oil producers rejoice while consumers feel the hit to their wallets.
WHO OR WHAT TO BLAME FOR THE SPIKE
The question many are asking is what is driving this year to be so much higher than in the past few? Well, it depends on whom you ask. The mainstream media will, of course, blame the spike on President Trump and cite a direct relationship with abandoning the Iran nuclear deal.
Some analysts point to The Organization of the Petroleum Exporting Countries (OPEC), who along with other major oil producers including Russia, agreed in 2016 to reduce output by 2% thru 2018. The premise was to cut production in the hopes of eliminating a global excess and push recovery for the industry from the fallout of 2014 when oil prices collapsed. This agreement has been even more successful than anticipated due to the drastic decline in Venezuela’s production of oil due to political and economic chaos. However, the group is scheduled to meet in June to decide if they will continue the accord past this year.
Others support the theory that the market drives the cost of gasoline up or down based on activities of commodity traders and the movement in the value of the U.S. dollar. The commodities futures markets allow companies to buy contracts of gasoline for future delivery at an agreed-upon rate. The amount depends on what buyers think the price of gas or oil will be in the future. When traders believe gas or oil prices will be high, they bid them up even higher. It is great for investors, not so great for consumers. Also, all oil contracts are denominated in dollars. This results in higher rates for gas and oil when the value of the dollar declines and vice versa.
SHORT-TERM VS LONG-TERM EFFECT
It is probably safe to say there are a plethora of activities responsible for the fluctuation of gas prices. The bigger question is how long will the high fees at the pump continue? The strong economy should allow for us to endure the increases in the short term. However, a long-term increase will more than likely result in behavior changes. Those who took advantage of the rock-bottom rates at the pump over the past few years and bought gas guzzling 4X4 trucks may have to trade them in for more fuel efficient or electric cars. Also, ride-sharing and mass transit alternatives may become more popular once again.
We live in a different world since 2014 and are no longer at the complete mercy of OPEC. As a nation dependent on oil and gasoline there appears to be a significant need, now and in the future, to continue finding ways to ensure our independence and allow us to be a major player in oil production and exportation.