So to anyone currently following the state of the economy, or anyone owning a car, it is generally well known that gas prices are surging and this is related to the conflict in Ukraine. Normally one hears "Russia is one of the world's largest oil producers" and "Most of the world have place trade sanctions on Russia because of their invasion of Ukraine" and assume that that's all the explanation that's necessary to explain the shortage of gasoline and the skyrocketing prices.
What the above assumption doesn't take into account is that Russia only makes up 8% of the oil market and that the US is the world's largest oil producer. So why are prices rising domestically despite how little the Russian market should theoretically be affecting us? Well it's a few things.
First up is that since the US is the world's largest producer of oil, it's also the world's largest exporter of oil. Since almost the rest of the world isn't on par with Russia or the US's oil production, they now have to buy from somewhere else. This means that in the US, not only are we losing the oil that we would typically get from Russia, we're also picking up some of the slack for their absence in the market. That in turn leads to less oil in the US.
The second issue is that US oil refineries are out of date and investors are too scared to pour money into renovations. It's not that the factories are falling apart or anything that severe, but rather they were designed to refine a different kind of oil than what the US is currently pumping out of the ground. This means the US has import oil it can refine, and export the oil it can't. Since this exchange has been broken, it means that even if we keep drilling new oil, we won't really be able to refine it that well. As for the investors, most places don't want to put more capital into refineries due to the large fluctuations in demand that the oil market has. Especially now a days when another shutdown would basically shoot the oil industry in the knees.
Essentially the crisis in Ukraine is still responsible for the hike in gas prices in the US, but there's more nuance to it. In addition it looks like the US should invest in updating refineries so they can handle the oil that's currently being drawn so it can be more self sufficient to some degree in case another situation like this occurs.
https://www.cnbc.com/2022/03/26/why-gas-prices-have-soared-in-america.html
It's interesting to see how at the end of day, the fuel price hike leads back to the decreased supply of oil in the international market, along with the inherent increase in global oil demand that has undoubtedly been caused by the mobilization of Ukranian and Russian armed forces, causing market forces to drive prices higher
ReplyDeleteI saw a report today that Biden announced the US would tap into oil reserves once again to try and relieve the pressure of price increases. The releases are expected to be up to 1 million barrels a day so hopefully we see a decrease in prices. It'd be very unfortunate to see a large increase in the supply of oil, yet prices don't decrease indicating clear collusion.
ReplyDeleteOil prices are increasing right now but they won't stay increasing as the market is able to adjust from Russia's invasion of Ukraine. I wonder if the increase in gas prices will lead to dramatic lifestyle changes for people, such as taking public transportation to work, electric cars, or maybe working from home since that's something that's become more common as a result of the pandemic. Because right now it seems like the public is putting up with the high gas prices and not really buying far less.
ReplyDeleteI think that the war in Ukraine is very eye opening for many world leaders and individuals as we have noticed the impacts felt around the world. The main impact we have noticed is the increase in oil and gas prices. President Biden has decided to release oil reserves to help combat the prices, but I believe that we need a better long term solution to help decrease our dependency.
ReplyDelete