Picture of Christopher A. Hopkins, CFA

Christopher A. Hopkins, CFA

Don’t look now, but gas prices are headed higher

It was only last December when it looked like drivers might catch a break at the gas pump. Despite the modest reprieve over the past few days, reality is about to intervene heading into spring and summer. Russia’s invasion of Ukraine is the dominant factor as the West imposes oil sanctions against the Putin regime. But beyond the impact of the war, several complicated factors are coalescing to inflict more pain on American motorists with each fill up.

The US announced a ban on imports of Russian oil in March of 2022, part of a coordinated regime of international sanctions against Russia. The European Union later took the difficult step of embargoing all seaborne imports of Russian crude on December 5, a courageous move given Europe’s dependence on Moscow for much of its energy. While Putin has been able to redirect some exports to China and India, the disruption has put pressure on global crude prices and elevated the retail cost of gasoline.

But a much more powerful sanction is scheduled to take effect this week, when the EU imposes a ban on all refined petroleum products from Russia, including gasoline, diesel, and jet fuel. Given the fragmentation in the global distribution of refined products, it will be much harder for Russian refiners to redirect their output, putting a squeeze on supplies and pushing prices higher.

The impact will be felt most acutely in the Northeast but is probably going to pinch drivers across the country.

First, while the US is a substantial net exporter of refined products like gasoline, the Atlantic states import a significant quantity of motor fuel, much of it from Canada and Europe. There is simply not enough pipeline capacity from the Midwest and Gulf states refineries to fully supply the East Coast, which comprises half of all US gasoline consumption. Meanwhile, alternative shipping methods like tanker trucks and barges from the Gulf Coast are more costly than importing directly across the pond. Buying gasoline from the EU has until now been a simple matter of economics. Given the new ban on Russian imports, Europe will be scrambling for replacement supplies rendering export to the US more costly or entirely unfeasible.

Meanwhile, US inventories of gasoline of the East Coast are already near 10-year lows, while diesel stockpiles are 20% below seasonal averages, contributing to the price pressure. And even as supply is short, Americans are back on the road and driving more than seasonal averages.

The supply constraints are further exacerbated by a sharp reduction in refining capacity in the Eastern region. Many plants delayed critical maintenance tasks during 2020 and 2021 and must now catch up. At least 15 regional refineries are planning shutdowns ranging from 2 to 11 weeks between now and May 1. This further constrains the already diminished capacity given that 6 major refineries in New York, New Jersey and Pennsylvania have been permanently shuttered in the past 20 years causing a 50% reduction in overall output in the Eastern region.

Just as supplies tighten in the West, China is emerging from its Covid lockdown and reopening its economy. According to estimates from the International Energy Agency, global consumption of crude oil is expected to increase by nearly 2 million barrels per day in 2023 led by surging Chinese demand. And it bears noting that while the US had been releasing oil from its strategic reserve since last summer in a move aimed at tempering rising gas prices, the emergency stockpile is now being replenished, adding further to the increase in demand.

Furthermore, since most of the world’s petroleum is traded in US Dollars, the value of the Greenback directly affects oil and gas prices. After a solid year of gains, the Dollar has declined by 10% over the past 2 months, effectively raising the price of oil in Dollar terms, a trend that seems likely to persist. If you wish to ponder the doomsday scenario, imagine that Congress fails to raise the debt ceiling, triggering a collapse in the value of the US currency. Yikes.

And as if that wasn’t enough, summer is coming. Obviously, that means more driving. But many consumers may not know that to minimize vapor emissions during the warmer months, most states mandate the use of modified gasoline blends between March and October. The reformulation requires retooling of refineries and is also more costly to produce. Refineries will begin the changeover as early as February, adding a few more extra pennies per gallon at the pump.

This challenging confluence of factors is leading most analysts to predict even higher gas prices before any significant relief is in sight. According to Gas Buddy, the average retail price for unleaded regular will likely exceed $4 per gallon by March.

There is light at the end of the hose. Barring a substantial escalation of the war in Ukraine, consumers should begin to see lower prices as the summer driving season winds down and global oil markets adjust to the new geopolitical realities. Unlike 20 years ago, the US is once again the world’s oil and gas colossus and since 2020 has become an overall net exporter of petroleum products despite specific geographical supply quirks that can cause regional disruptions. Prices will fluctuate, but energy security at least is no longer an issue.

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