World

Why Do Gas Prices Keep Rising?

READING TIME ~ 3 MINUTES

Even if you haven’t driven much because of the pandemic, you’ve definitely noticed the surge in gas prices. As of now, the national average price per gallon of gasoline is $2.88. Just 4 months ago, it was 70 cents cheaper per gallon!  Truth be told, this number is not absurd: gas prices have been even higher than this in the recent past as well. But what alarmed so many people wasn’t how much the prices increased, but how quickly they increased in a short period. 

So what’s causing this steep increase in gas prices? 

Gas prices in Massachusetts (Flickr)

The main causes of the rise in prices are:

  1. Simple Supply and Demand
  2. Changes in US gasoline production
  3. The result of OPEC negotiations

1: Simple Supply and Demand

A simplified explanation for the increase in prices is that the demand for gasoline grew as the economy started returning to normal. Basic economics show that an increase in demand for gasoline causes an increase in price. Eventually, the supply for gasoline would also increase because domestic and foreign gasoline producers will produce more gasoline to sell them at this higher price. However, it’s taking longer than it usually does. Why? Because America’s and the rest of the world’s gasoline production numbers aren’t what they used to be. 

2: Changes in US Gasoline Production

The early COVID-19 pandemic: A year earlier in March 2020, domestic and foreign demand for gas was decreasing drastically. Most had started their quarantines, which meant they didn’t travel as much. American oil refineries struggled to sustain themselves through most of that year. By late 2020, more than a dozen domestic refineries had closed, and many of these closures were permanent. These refineries once produced over 1 million barrels of oil a day. 

The Texas power outage: About 25% of all American gas production and 40% of all crude oil production occurs in Texas, making it the state with the greatest control over America’s gasoline production. When the winter storm hit Texas, these oil refineries were damaged by it. This directly affected  prices in late February. Texan refineries said the effects of this stoppage would still be seen weeks after the power outage ended, in early- and mid-March.

An oil refinery in Groves, Texas, before the power outage

3: The Result of OPEC Negotiations

During the pandemic, low world demand for gasoline lowered prices. In response, most oil-producing giants like Saudi Arabia and Venezuela, in a coalition called OPEC (Organization of Petroleum Exporting Countries), agreed to collectively decrease their oil production in order to increase prices. 

But, amid rising demand for oil, the OPEC nations have been slow to react and again boost their production. Likely, they are making sure that the demand for petroleum is showing consistent growth before they begin negotiations about how much each OPEC nation can again restart production with. 

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So will prices decrease in the near future?

Since most of the causes listed are short-term, it is likely that they will decrease. Once the OPEC countries are convinced that demand for oil will stay high, they will loosen restrictions on oil production. Texan oil producers have already started to recover from the power outages a month ago. Once these two changes occur, the increase in the supply of oil will naturally offset the increase in demand for oil, leading to a decrease in gas prices. 

TL;DR

  • American average gas prices have increased dramatically in the past few months, rising from about $2 in early December to $2.88 now. There are three main causes for this increase in prices. 
  • The first is a simple increase in demand for oil as more Americans get vaccinated and warmer weather prompts more people to travel. The increase in demand caused a subsequent increase in price. 
  • The second is a long-term decrease in America’s capacity for oil production because of the early COVID recession, which forced many American oil refineries to permanently close and stop petroleum production.
  • The third is because of the world’s supply of oil. OPEC (Organization of Petroleum Exporting Countries) member nations decreased oil production early in the pandemic to offset the decrease in demand for gas, and they have been slow to react to the recent increase in gas demand
  • In the near future, gas prices will likely decrease again as OPEC nations and American oil producers increase production and the supply of oil. 

Sources: 

https://www.eia.gov/state/print.php?sid=TX

https://www.yahoo.com/now/why-gasoline-prices-rising-high-162200876.html

https://www.forbes.com/sites/rrapier/2021/03/06/who-is-to-blame-for-rising-gasoline-prices/?sh=5b55e0b4329c

https://www.toledoblade.com/local/transportation/2021/03/05/texas-power-outages-just-one-of-several-factors-in-gasoline-rebounding-price/stories/20210304117

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