How can we cope with higher gas prices?
Published March 10, 2022
Gas prices are on the rise. As I am writing this column, the average national price just jumped to over $4 per gallon. By the time you read this, it could be significantly higher.
People worry about gas prices for two reasons. First, we are a mobile society. Most of us drive to work, to stores for shopping, and to restaurants and entertainment venues for fun. So higher gas prices increase the cost of many of our regular activities.
Second, higher gas prices are also an added cost for businesses that purchase inputs from other producers. Many of these inputs are delivered by trucks and vans. When the price of gas goes up, deliverers of inputs to businesses must charge more. And when business costs rise, those higher costs will be passed on to consumers.
Gas prices have actually been rising for a while. Prior to the pandemic, pump prices ranged between $2.50 and $3.00 a gallon. When a large part of the economy was shut down and people stayed at home from work, schools, and shopping, gas prices plunged to under $2.00 per gallon.
The lower gas prices during the pandemic made pumping oil – which is the prime energy source of gasoline – less lucrative, so both international and domestic producers of oil cut output. In early 2020 - the height of the pandemic - international oil production dropped 15% and US oil production fell 26%. As the economy recovered from the pandemic and driving increased, international and domestic production increased but are still not back to pre-pandemic levels. As a result, gas prices were above $3 a gallon when 2022 began, yet lower than a decade earlier.
Interestingly, prior to the Ukraine War, energy experts forecasted gas prices would trend downward in 2022. They thought oil prices were high enough to encourage more international production at the same time the increase in driving would slow. The U.S. Department of Energy thought gas prices would be around $2.80 by the end of 2022.
Then Russia invaded Ukraine in late February. Oil prices surged by one-third and took gas prices with them. The rapid price increases were driven by two worries. One was whether the world would stop buying Russian oil, which accounts for near 10% of the international oil supply. Less supply – with no change in buying – always results in a higher price.
But there are worries beyond the energy market. Could the Ukrainian War lead to a direct military confrontation between the two major nuclear powers – the U.S. and Russia? Direct confrontations between these two countries have been avoided, with only a few close calls – the Berlin blockade in 1948, the Cuban missile crisis in 1962, and the Middle East Yom Kippur War in 1973.
With the uncertainty over a U.S.-Russia stare-down, the financial values of necessities, such as precious metals, basic foods like grains, and energy commodities including oil, soar. If this uncertainty moves toward a possibility, these prices will rise even more.
What can be done? The answer is at two levels – what can be done collectively, and what can be done individually?
Let’s look at the collective options first. One is to increase the supply of oil by drawing down on the U.S Strategic Oil Reserve, where almost 600 million barrels are stored. If the U.S. relied only on this oil, it would carry us for a month. Or, if we used the reserve to replace the Russian oil we buy, we could avoid Russian oil for almost three years.
What about ramping up our own oil production? U.S. oil production has been increasing, but it is still 8% under pre-pandemic levels. Like many industries, oil production has faced labor and equipment shortages, as well as unsupportive investors and stricter government rules. But even if these limitations were fixed, many experts think it would be 2023 before production could be back to pre-pandemic days.
One source that could quickly help is Saudi Arabia, which has the ability to swiftly increase oil supplies. However, the Saudis would have to be convinced to give up some of the benefits they are now reaping from the extraordinary high price of oil.
Last, we could try to reduce our use of gasoline by having the government impose limits on gas purchases. Less gas buying would put some downward pressure on both gas and oil prices. I lived through a version of this in the 1970s with odd/even buying days based on your license plate number.
At the individual level, higher gas prices will motivate each of us to try to limit our use of gas. Eliminating un-needed trips and consolidating necessary trips are examples. Substituting remote buying for in-person buying could also help us reduce gasoline usage.
In my opinion, we are in the midst of one of the most serious international events since World War II. I hope that both individually and collectively, how we decide to react to the crisis will ultimately lead to a satisfactory and safe outcome.
Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.