For the first time in history, U.S. motorists are facing the specter of forking over $5 for a gallon of regular gas. Gas prices have more than doubled in two years, with the current price of $4.95 a gallon an all-time high thanks to a rare and egregious combination of health, economic, and geopolitical forces manifesting themselves at the pump.
The big culprit, of course, has been the relentless march by crude prices, with WTI prices jumping 57% since the beginning of the year, thanks in large part to Russia's war on Ukraine. Crude oil accounts for nearly 60% of the price of regular gasoline.
But Russia's invasion is only part of the problem here. Gas prices were on course to breach the $4 a gallon mark for the first time since 2008, and the war only helped to hasten it. According to Tom Kloza, global head of energy analysis for the OPIS, which tracks gas prices for AAA, the national average will cross the dreaded $5 per gallon threshold in the next two weeks. Indeed, no less than 13 states have already reached that point, and more than 20% of gas stations nationwide are charging more than $5 a gallon for regular.
And, it could get much worse.
Exceptional Refining Margins
You can blame soaring gas prices on constrained supply, falling inventories, and super-fat refining margins.
Importantly, Europe has not only announced measures to phase out Russian oil but also plans to ban distillate imports (heating oil, diesel, jet fuel) - a much more niche seaborne product.
Over 50% of crude is sold on the seaborne market, with ships frequently traveling between continents on average voyages lasting 28 days; however, only 25% of global distillate production is sold on the seaborne market, via shorter regional routes lasting on average 15 days according to Morgan Stanley.
Morgan Stanley is concerned that as Europe phases out Russian distillate imports, shipping markets may be unable to provide the required transport to re-route Russian volumes, leading Russian refiners to reduce runs and further decrease global distillate supplies. Russia accounts for the vast majority of European distillate imports, while the remaining imports sail from destinations in the Middle East and India.
Meanwhile, fuel and crude inventories have continued to decline. Whereas it's normal for inventories to decline in the spring and summer months, refiners are now charging higher premiums because inventories are falling with no additional supply coming from Russia. In fact, crack spreads—aka refiners' margins—have doubled from the first quarter to the second to nearly $50 per barrel processed. Last month, Saudi's energy minister says that high fuel prices are a function of exceptional refining margins, a problem "that no producer can solve."
"This supply/demand dynamic, combined with volatile crude prices, will likely continue to keep upward pressure on pump prices," AAA said in a May 19 statement.
"Theoretically you could have oil be $1 a barrel and gas could be $10 a gallon if there's only one tiny refinery in the country operating. Oil is not at what it was in March when it hit $135, but what has changed is that gasoline inventories have continued to decline," Patrick de Haan, head of petroleum analysis at GasBuddy, has said.
Some help is coming, but won't be nearly enough to close the supply-demand gap.
Amid a global refining crunch, Kuwait has begun production at the first of three units in its newly built 615kb/d Al-Zour refinery, with the complex expected to fully ramp up by year end. The complex is one of two major refineries ramping up production this year, with Saudi's Jazan refinery just beginning to export oil products in May 2022 after starting the year at 50% utilization.
Meanwhile, TotalEnergies SE (NYSE:TTE) recently commenced production at its previously mothballed Donges refinery in France.
So, how much higher can gas prices go?
Although the current $4.95 a gallon is a record dollar amount, it's still below the 2008 peak of $4.14 adjusted for inflation, which would be about $5.56 now. With expectations of strong driving demand, JPMorgan analysts have predicted $6 a gallon nationwide before fall, while Natasha Kaneva, JPMorgan's head of commodities research, says the price per gallon could even jump to $6.20 a gallon by August.
That said, how high gas prices can go before demand destruction truly kicks in is anyone's guess, with some suggesting that it begins at $5 per gallon.
By Alex Kimani for Oilprice.com