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Gas prices skyrocket

Last night on the way back from my class, my dad pulled into our local Valero station to fill gas into his SUV. “Fill her up, please,” my dad said, as he handed over his credit card to the man at the pump. At $5.119 per gallon, the meter finally stopped at $100.84 when the attendant was done pumping. Imagine that! What used to be around $65 to $70 for a full tank of gas, has now gone up by 40%-50% over the last few months. Percentage hike wise this may not look like the energy crisis of the 1970s when, I’ve heard, outraged drivers went from paying about $0.35 per gallon in 1970 to about $1.2 per gallon in 1980. We are not yet at a record inflation-adjusted high, though we may still get there, if certain analyst predictions are to be believed. What exactly is going on?

The price of crude oil is the biggest driver of the cost of gas. Crude oil prices been moving northward since October and is now hovering around $120 a barrel, up from $70 only a year ago. Russia’s war in Ukraine led the US and EU to sanction Moscow, whose production of crude oil makes up about 12 percent of the global market. Prior to the Ukraine invasion, the US would procure 4 percent of its oil from Russia, but those sanctions have affected oil markets globally by making it more expensive for others to access that oil.

A second major driver of escalating gas prices is the costs of refining. Several refineries have shut down in the past few years and new refineries are coming up in their place. Further, most US refineries are working at near capacity. In other words, demand for more refined oil has approached pre-pandemic levels, but refinery capacity hasn’t quite kept up.

Yet there is hope, I’d like to believe. First off, the correlation between gas prices at the pump and the health of our economy isn’t exactly straight-forward. So conservative commentators pointing at Biden’s climate policies or canceled drilling leases in Alaska etc. are not quite right in their depiction of causality. Controlling oil supply isn’t quite like steps the federal government can take on monetary policy that show quick

results – there is no switch that can be easily turned on or off. If you look at our petroleum consumption, it has roughly stayed flat over the past twenty years, even as our economy has expanded. That simply means our economy today is far less oil-intensive. With improved fuel economy and more and more people switching to hybrids and EVs – this time around the oil price surge is very different from even in 2008, when gas prices went up. Today we spend a much lower share of household income on gas, than we did in 2008. But that said, the price hike is still hurting. We need more public policies that would help offset the impact of rising prices even more, from investment in clean fuels and energy efficiency to acceleration of alternative modes of transit, to policies that encourage working from home to maybe even policies that temporarily boost people’s incomes.

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