Episode 2: Why are gas prices getting so high? Will we see $10 gasoline?
Gasoline is something that economists call a relatively inelastic product, meaning that changes in price have little influence on demand, at least in the short term. This makes sense, as much travel isn’t discretionary (commuting, etc.). In contrast, air travel is highly elastic, with a 10% increase in the price of air travel leading to an around 12% reduction in the demand for air travel. With car gasoline purchases it is closer to 3.4% reduction for a 10% increase. There has been some recent data suggesting it’s becoming more elastic, but now we’re getting into the weeds.
So, what this is all getting to is that when gas gets more expensive, people still have to buy it in the same quantities, for the most part.
How much more expensive has gas become?
As of recording, the average gas price in the USA is $4.85 cents per gallon for regular and $5.63 per gallon for diesel. The most expensive state is California at $6.33 per gallon.
A year ago, regular gasoline was $3.05 average in the nation and $4.22 in California. That represents a 59% increase YoY.
What causes the state’s variation in prices?
Some states tax gas more heavily than others — California for example has a 61 cents per gallon tax, whereas Alaska only charges 14.6 cents per gallon. There is also a federal tax of 18.4 cents per gallon. The distance to a refinery also makes a difference, because that gas at the gas station has to be hauled in, one way or another. Some states (such as CA) also have certain blend requirements that can also drive up price.
Okay, so what can the government do about it?
Lyn Alden is one of the clear voices on inflation and macroeconomics that I follow. She has been saying lately that the government can print money, but they can’t print oil.
In the last episode we heard from President Biden that he announced on March 31st that he would be releasing 1MM barrels a day from the nation’s Strategic Petroleum Reserve. This will be the biggest withdrawal in the 46-year history of the reserve. In this speech Biden also blamed oil companies for leaving drilling prospects idle — this doesn’t make a ton of sense because his administration recently announced (after his March 31st speech) that the Biden Administration will not hold a lease sale for offshore drilling this year. They are also letting a 5-year plan for offshore drilling expire next month.
This prompted Frank Macchiarola Match-E-Roll-A of the American Petroleum Institute to respond: “Unfortunately this is becoming a pattern— the administration talks about the need for more supply and acts to restrict it. As geopolitical volatility and global energy prices continue to rise, we again urge the administration to end the uncertainty and immediately act on a new five-year program for federal offshore leasing.”
Links:
AAA Gas Prices: https://gasprices.aaa.com/
Strategic Petroleum Reserve: http://www.spr.doe.gov/dir/dir.html
DOE Strategic Petroleum Reserve Fact Sheet: https://www.energy.gov/fecm/strategic-petroleum-reserve-9
Air travel price elasticity of demand (IATA): https://www.iata.org/en/iata-repository/publications/economic-reports/air-travel-demand/
https://divestmentdatabase.org/
https://www.bloomberg.com/news/articles/2022-06-01/uk-windfall-tax-hits-north-sea-focused-oil-firm-valuations#:~:text=The%20UK%20government%20announced%20May,commit%20to%20fresh%20capital%20expenditure.
https://www.marketwatch.com/investing/future/brn00?countrycode=uk
https://www.wsj.com/articles/a-decade-in-which-fracking-rocked-the-oil-world-11576630807
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