There is no indication that the price of gasoline will decrease

Why doesn’t it seem that the increase in gasoline prices will slow down? Photo: Getty Images.

  • The situation in Ukraine, Russia, China and Iran is hurting the market

  • Government measures to stop the escalation are not working

  • It is a problem that affects the entire planet

Everyone is frustrated. If anyone can do anything, they will, but oil prices are gradual and seem unstoppable for the time being.

In the US, gasoline prices have reached $5 a gallon (about $1.3) and Moody’s Analytics thinks it could hit $5.50 within two weeks. There is no mystery. The confluence of factors, led by the Russian invasion of Ukraine, reduced the supply of oil and increased demand. More things can be twisted, adding a file “scary cousin” To the prices that are added to the increase caused by market dynamics. This won’t last forever, but for now there are no signs of mitigating oversupply, declining demand, or an explosion of stability.

There are four things that harm buyers of fossil fuels. First, sanctions against Russia, the world’s third largest oil producer. So far, sanctions have slightly reduced Russian oil sales, but Europe is gradually imposing a ban and plans to cut Russian oil purchases by 90% by the end of the year. It is possible that Russia will be able to sell this oil elsewhere, but exports are likely to decline, reducing global supply and raising prices. Since oil prices are set in the world market, No nation can isolate itself from influence A decrease in supply or an increase in demand affect prices.

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China appears to be emerging from severe coronavirus lockdowns that have slashed its economic activity, including energy consumption. As the Chinese economy recovers, energy consumption will increase, putting upward pressure on prices. There was some hope that a new agreement with Iran over its nuclear weapons program would lead to the United States lifting its sanctions and offering more Iranian oil to the global market. But Iran appears to have stalled the negotiations, making a deal unlikely. Finally, President Biden and other leaders have already released massive amounts of oil from national reserves, leaving little room for future releases.

Oil’s ‘bullish nightmare’

Raoul LeBlanc, vice president of energy practice at S&P Global, refers to these four factors as a “nightmare bull scenario” that could push oil prices higher, making oil sellers richer while hitting investors.

“Current prices reflect the risks of that happening,” LeBlanc said. “Current prices make sense if you think about the big drivers of price hikes.”

How much can consumers afford? Moody’s Analytics believes the peak US cap is $5.50 per gallon of gasoline; Prices are likely to fall steadily from the second half of this year. However, the research firm has analyzed the potential impact on US consumers and the US economy if the price reaches $6 or even $7. Surprisingly, neither scenario will lead to a recession.

‘Big place in the mind of the American consumer’

But the payload can be large, as any driver imagines. In both scenarios, with record prices, consumer spending elsewhere will be cut and GDP growth will decline, but growth will remain positive and any imbalances will resolve themselves. However, there may be an outburst of anger among consumers.

“Gasoline prices, with their omnipresent luminosity, loom large in the minds of the American consumer as they relate to inflation and their interpretation of the health of the economy,” said Moody’s Analytics economists Matt Colyar and Ryan Sweet.

President Biden is said to be alarmed by the massive rise in energy prices that threatens to destroy his presidency, but it is not a central issue to the United States and there is not much he can do about it. Like many others, Biden wants US oil producers to drill more. Production in the United States is growing modestly and likely to set a new record next year, but energy producers have been burned many times in boom-and-bust cycles, where when the price goes up they mine more, and prices fall and prices fall. Money loss.

Why does high oil prices not look like easing

Richard Thomas, 41, of Fontana, carefully observes how many gallons of gasoline he is filling in his nearly empty tank at a Chevron gas station at the intersection of Cesar Avenue. Chavez and Alameda Street in downtown Los Angeles (Mel Melcon / Los Angeles Times Across Getty Images).

“High prices are not good for me,” Chevron CEO Mike Wirth said during a June 7 event sponsored by the Center for Strategic and International Studies. “In our industry, demand always moves faster than supply. There are incentives for producers to produce. This is not always the most common, but it makes the markets work.”

This may sound disingenuous, given that Chevron is one of the big oil companies making huge profits right now, but many industry executives point out that US energy companies had ramped up production for years before the 2020 recession caused by COVID, which has become A bloodbath for fossils. Fuel sector where demand collapsed and oil prices fell for a short period. It was an exciting experience that energy companies and their investors do not want to repeat.

What should happen to improve the situation?

The best thing for oil consumers is to end Russia’s barbaric invasion of Ukraine. Sanctions on Russia will likely remain in place, but some of the fear premium will dissipate as the worst-case scenario is expected to improve. There are no signs of a breakthrough in the war, but the United States and other countries sending weapons and aid to Ukraine could accelerate the time horizon to help defeat Russia on the battlefield if it is to end the increase in the price of oil.

A less favorable solution is a global recession, which some economists already say is coming. Europe, which is highly dependent on Russian energy, may already be in the midst of it, and the US economy is certainly calming down. Recessions lead to lower commodity prices due to economic stagnation and lower demand, which is exactly what oil prospectors are looking for. This may be what Russia wants. The battles are also taking place in the markets.

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Rick Newman

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