Why $5 Gasoline Looks Inevitable

As Russian troops were massing on Ukraine’s border back in February, I wrote Russia Is A Major Supplier Of Oil To The U.S. I warned:

“Russia supplied 7% of U.S. oil imports in late 2021 – a significant number. Replacing that oil will put additional upward pressure on global oil prices, virtually assuring that oil will exceed $100/bbl if the situation further escalates.”

What I didn’t explain in detail in that article is that most of the imports coming from Russia were finished products. The U.S. imported some gasoline, but it was primarily distillates (e.g., diesel), and unfinished oils like naphtha that are used by refineries to make gasoline.

Following the decision to stop importing Russian oil, there has been a number of cascading effects. The loss of distillates, gasoline, and gasoline ingredients has refiners scrambling to make up a deficit.

At the same time, jet fuel demand has come roaring back as people are now taking trips that they put off during the pandemic. Both the loss of Russian oil products and surging demand for jet fuel have forced refiners to maximize diesel and jet fuel production. That negatively impacts the ability to maximize gasoline output.

Adding more fuel to the fire, demand for gasoline is near historic highs. Thus far, high gasoline prices haven’t negatively impacted demand. The reason for that is that the job market is strong, so consumers are still paying whatever it takes to fill their tanks.

The net result is that inventories of both distillates and gasoline are well below the normal range for this time of year, while refiners are running at over 90% operable capacity. There isn’t a lot of room for additional production.

I noted last month that Gasoline Prices Have Peaked For Now, but I also warned that we were unlikely to see significant relief any time soon. From late March to late April, gasoline prices declined. However, diesel prices remained strong.

The need for refiners to respond to high diesel prices — at a time when gasoline demand is soaring — once again caused gasoline prices to begin rising. In the past week, the national average price for gasoline has exceeded the peak levels of March.

Unfortunately, there is no immediate relief in sight. U.S. oil production continues to rise, but there is a refining constraint that will continue to impact the finished product market for months.

We are unlikely to see significant relief until after summer driving season peaks, when higher oil production and lower gasoline demand will probably combine to send prices lower.

Until then, it seems likely that the national average price of gasoline will exceed $5 per gallon. This poses a significant risk to the U.S. economy as consumers will find themselves short of discretionary income.

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