Written by Josh Ravichandran
The price of gasoline within the United States has hit a record high with the average price of gasoline reaching $4.173 a gallon according to AAA. U.S. crude oil futures reached a price of $119.40–a 59% increase from the start of this year. In addition, US oil refineries have limited production as a result of the COVID-19 pandemic. The current capability for daily domestic production is only producing 18 million barrels of petroleum, whereas pre-pandemic the US had the capability to produce 19 million barrels a day. President Biden also announced that he will be launching new sanctions against Russia as a result of the war against Ukraine. In an executive order issued on March 8th, 2022, President Biden banned the import of Russian crude oil, liquefied natural gas, and coal. In 2021, the United States imported roughly 700,000 barrels of crude oil and petroleum daily from Russia. In lieu of this, the United States has been looking in the short-term to match supply with demand domestically, however this process takes time. All of this combined has dramatic effects on domestic life far beyond just filling up at the gas pump.
The price of flights within the U.S. have been directly affected by the price of gasoline as rising fuel prices have to be accounted for. Unfortunately for consumers, airline companies determined that consumers will be the ones who bear this cost with nearly 100% of the extra price of fuel going directly into the cost of tickets. The demand for flights coming out of the pandemic means that airlines see their goods as less elastic, and they will not lose profits with higher prices. This is a change from the previous business practice of the airlines absorbing the cost of higher fuel prices. The graph shown in Figure 1. compares the historical trends of average cost per gallon to the typical price of an airline ticket. In the past, even when the price of gas rose, the price in tickets did not always respond with a price increase. With more people looking to travel abroad coming out of the pandemic, airlines face less competition with trains, buses, and driving as they are not ideal methods of transportation for international travel. While higher gas prices are not normally felt by flyers, this time may be different.
Figure 1. Source: Bureau of Transportation Statistics
Airplane tickets are not alone in this price rise either. Major ride-sharing company Uber announced that starting this month that they will be implementing new surcharges to combat the higher price of fuel. Riders should expect to see an added cost of $0.45-$0.55 on each trip, and UberEats users should expect to see an added cost of $0.35-$0.45 per order. These additional surcharges were implemented to help support drivers as fuel becomes more expensive, with drivers keeping 100% of the fee. Uber stated that these costs will remain in effect for the next sixty days and will be re-evaluated to see if it should continue then. As a way to support greener transportation Uber is issuing its electrical vehicle drivers an extra $1 per ride up to $4,000 annually through their green futures program, but many drivers are unable to switch from gas to electric in the short-term.
In addition to transportation costs, the prices of groceries have also increased throughout the nation. Diesel has risen to a price of up to $6 in some places, and trucking companies have seen a huge hit to profits as a typical truck holds around 200 gallons of diesel. Different states have varying tax laws on gas so the individual impact will vary on a state to state basis, but it is estimated by the American Trucking Association that nearly 70% of all freight is transported by trucks. This major shock to the national supply chain system means that at every level of transport prices have to rise if companies want to remain profitable. This can be felt everywhere from grocery stores to restaurants.
The supply for gasoline changes much faster than the demand can, so oil refineries need more time to invest in new refineries. Domestic oil producers are having difficulties expanding production, as securing funding from banks has been an issue recently. With less reliance on foreign oil to keep the prices down, some economists warn that the higher prices of gasoline may cause an economic downturn as it affects so many aspects of the economy. This happened in the 1970’s when rising gas prices created an economic downturn, but luckily there is reason to worry now. Although it is impossible to predict the future, there is a decreased dependence on fossil fuels which gives reason to not panic. In addition, there are higher rates of savings amongst households which indicates that more people are able to pay higher gas prices, even if they were not expecting it. Lastly, the United States is a price taker for oil and natural gas, rather than a price setter. This means that even if the US were to have higher gas prices domestically, the global world market is where the price is set so demand will be met with foreign supply. In this case, gas prices would not be solely a domestic issue but instead a global issue, affecting most countries equally.
In the future, the United States has to shift towards renewable energy and resources to avoid dependence on fossil fuels. Increasing the domestic production of oil in the short term will help lower gas prices, but this change will take much longer than is needed to meet the demand. President Biden has made this cleaner future mission very clear, but with a crisis between Ukraine and Russia increasing domestic oil production in the short term is a viable solution. Companies such as Tesla are paving the way for the future to avoid issues like this, and hopefully oil prices affecting consumer life can become a thing of the past.
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