Why Are Gas Prices So High?

Everybody is feeling pain at the pump — here's the lowdown on what's causing gas prices to be so high.

Why Are Gas Prices So High?

Man holding cash because gas prices are so high

As of June 16, 2022, for the first time in history, gas prices average about $5 a gallon in the United States and show no signs of going down anytime soon. By the time you read this, they may be even higher.

So, why are gas prices so high all of a sudden? Well, it turns it out that a perfect storm of circumstances brought us to where we are today. Let's take a look at the cause of the 2022 gas crisis.

The President Does Not Control Gas Prices

While you may see blame placed on the current president on social media, there is no truth to the statement that the commander-in-chief has any control over gas prices.

Yes, governmental policies and legislation can play a role in gas prices to some degree, they are are influenced by oil prices which are, in turn, dependent on supply and demand.

If you need any more proof of this, look at other countries around the world — gas is higher than ever in many of them.

Let's Talk About OPEC+

OPEC+ is compromised of 23 oil-exporting countries. This group meets once a month in Vienna, Austria, to decide how much oil to produce and sell.

At the core of OPEC+ are the 13 main OPEC nations (aka the Organization of Oil Exporting Countries). This organization was formed in 1960 with the goal of fixing the supply and price of oil worldwide. OPEC nations are located mostly in the Middle East and Africa and produce about 30 percent of the world's oil supply.

In 2016, the original OPEC nations added 10 non-OPEC, oil-producing countries to create OPEC+, which altogether produces about 40 percent of the world's oil supply. Russia, which generally produces about 10 million barrels of oil a day, became a member of OPEC+. (Yes, we'll get to Russia in a minute.)

COVID's Lesson in Supply and Demand

One of the things that caused the escalation of gas prices over the past two years was the COVID-19 pandemic. As commercial travel ground to a halt in April 2020, OPEC+ nations had a surplus of oil — essentially there was a greater supply of oil than there was a demand for it — and it cut back production to sustain prices.

In July 2021, OPEC+ nations agreed to increase oil production to reach pre-COVID levels. Demand quickly shot back up — in fact, too quickly for OPEC+, which was not ready or, frankly, willing to increase oil production to pre-pandemic levels.

With a high demand and low supply, prices began to go up. Despite this, OPEC+ decided not to increase oil output.

OPEC+ and the Effect of the War in Ukraine

U.S. President Joe Biden and U.K. Prime Minister Boris Johnson have asked OPEC nations (Saudi Arabia and the United Arab Emirates, respectively) to increase their oil output without much luck. According to a non-resident fellow at the Arab Gulf States Institute, Kate Dourian, "They don't want to be dictated to by the West."

At the same time, other OPEC nations (Nigeria and Angola, for example) are struggling to increase their output and haven't been able to make their production quotas, according to the Gunvor Group's Chief Economist, David Fyfe. "Investment fell off during the pandemic, and oil installations, in some cases, haven't been well maintained. Now, they're discovering they can't actually deliver production increases in full."

On top of everything else, OPEC+ must respect Russia's wishes (remember, Russia is a member of OPEC+ and one of the world's top producers), and the U.S. banned the importation of Russian oil in March 2022 due to its war with Ukraine.

Other oil-rich countries, including Venezuela and Iran, are also under U.S. sanctions.

What About U.S. Refineries?

While the president can't do much to control gas prices, he has asked U.S. refineries to do more to boost supplies, stating that their record-high profit margins show they are taking advantage of the crisis. (U.S. refineries also cut production during COVID.)

Biden said, "My administration is prepared to use all reasonable and appropriate federal government tools and emergency authorities to increase refinery capacity and output in the near term, and to ensure that every region of this country is appropriately supplied.

"I request that you provide the [energy] secretary with an explanation of any reduction in your refining capacity since 2020 and any concrete ideas that would address the immediate inventory, price and refining capacity issues in the coming months — including transportation measures to get refined product to market."

John Kilduff, a founding partner of Again Capital, which invests in energy, said of this request, "There is nothing left to ramp up."

According to Kilduff, U.S. suppliers are already doing what they can, as no new refineries have been built in decades, and the current ones have been expanded on as much as possible.

Price Gouging at Gas Stations

Gas stations do control pump prices to some degree. Nevertheless, they aren't really price-gouging. The majority of the country’s 150,000 gas stations are independent retailers, despite using the branding of big oil companies.

Station owners set gas prices based on their expectations of what they will pay for the next fuel delivery. They get most of their profits from whatever else they sell — food, cigarettes and other non-fuel essentials.

Consumers buy less gas when it's more expensive; therefore, gas stations make more money when prices are lower.

When Will Gas Prices Go Down?

Even in a typical year, gas prices go up during the summer months as people travel more. By the fall, they begin to come down.

But this is not a usual year. COVID is still surging and the invasion of Ukraine by Russia continues, as do U.S. sanctions on Russian exports.

If the war ends, global crude prices will ease, and people will see a drop in gas prices — but it will take some time, as consumers would have to work through the higher-cost inventory already available.

Nevertheless, any hiccup (for example, a refinery outage) could have a significant impact on prices and keep them higher longer.