The Washington Post, New York Times and many other major media organizations are proclaiming we have hit a new record high gas price. AAA set the national average at $4.173 per gallon this week. That price does beat the highest previous record set back in 2008 in absolute terms, but adjusting everything for inflation paints a slightly better picture—though inflated prices are likely here to stay.
Russian Oil Ban
The events impacting today’s gas prices are totally unique to the issues that plagued the market back in 2008. President Biden’s announcement today that the U.S. would halt all imports of Russian fuel is a manufactured and anticipated supply crunch that the market will have much more control over, despite the dramatic immediate impact that has set the new pump price “record. ”
Biden announced that the U.S. would not “be subsidizing Putin’s war” in reference to Russian leader Vladimir Putin’s invasion of Ukraine and Crimea, with sanctions that cut off oil and gas imports from Russia, via Business Insider. The International Energy Agency says Russia’s oil exports represent 12 percent of its annual global trade.
Considering the U.S. only imported 3.3 percent of its crude oil supply from Russia last year, according to the U.S. Energy Information Administration, the actual supply being cut is not overly substantial so far. So why have prices already gone up?
Rising Gas Prices
While not every country will join the U.S. in cutting off Russian oil exports, it’s enough to have an impact on the total global supply of oil moving around the world. The embargo against Russia is significant enough to likely force a permanent shift in global oil production away from any reliance on Russia. In the meantime, countries will have to now replace their Russian oil with existing supply from somewhere else, which will increase demand on non-Russian sources.
That anticipated drop in global supply is why prices have already shot up to record numbers. If oil producers know there could be higher demand, they will raise prices even before a real shortage exists. Countries will potentially begin to stockpile and reserve their oil, further minimizing available supply on the global market.
That’s the volatility of global supply, but there’s more going on stateside to contribute to the hiked prices, as well. U.S. oil stock is also lower than it was the same time last year, which isn’t going to help. From AAA: “The current stock level is approximately 15 percent lower than at the end of February 2021, contributing to pressure on domestic crude prices. ”
U.S. Demand Also Higher
On the flip side of the supply coin is demand. Assuming the U.S. demand for oil was steady, losing some Russian supply would have less of an impact. But demand for oil has been rising in the U.S., which will only make the price go up faster.
From AAA: “According to new data from the Energy Information Administration (EIA), total domestic gasoline stocks decreased by 500,000 bbl to 246 million bbl last week. Meanwhile, gasoline demand rose slightly from 8.66 million [barrels per day] to 8.74 million [barrels per day]. The increase in gas demand and a reduction in total supply contribute to rising pump prices. “
Adjusted For Inflation
Monday’s announced national average gas price of $4.173 per gallon of regular gasoline is the highest ever recorded at the pump in the U.S., sure, unless you adjust the dollar value to that of its 2008 value (when the previous record was set). Do so, and guess what? You paid more for gas back then.
Gas hit a previous record of $4.086 at the pump back in June of 2008, but adjusted for inflation, and folks were paying what would be around $5.25 per gallon in today’s money. We’re not saying you can’t complain about the price of gas going up, but it may help you feel better to know it has been much worse, value per dollar, in the past.
How Long Will Gas Prices Be Higher?
Oil supply lines were already reportedly tight before Russia invaded Ukraine, and now that the conflict has interrupted those supply lines, expect costs to rise as long as the conflict and sanctioning of Russia continues. In response to the tightening supply and introduced demand, other major oil producers, including the U.S. and members of OPEC will increase oil production to meet demand, but it will take time. Bloomberg reports Venezuela and Iran may also increase production to boost global supply this year.
But the shifting and disruption of what had been firmly established supply routes and trade agreements will take months, if not a few years to finally iron out. In the meantime, that volatility means gas prices will continue to fluctuate, if not remain permanently elevated for the duration of the conflict, and likely long after.
Keyword: Gas Prices Hit All-Time High, But You Still Paid More in 2008