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Fuel Price is skyrocketing, but ...

Updated: Apr 6, 2023

A few minutes before 09:30 EST yesterday, Brent Crude began trading at $80.96, a 1.73% rise over Monday, due to the official announcement of the Administration's plan to lower gasoline prices by releasing 50 million barrels of oil from the Strategic Petroleum Reserve (SPR). Other major oil-consuming nations, including China, India, Japan, the Republic of Korea, and the United Kingdom, are joining the US in this effort. Although 50 million barrels seems like a lot, it is only two and a half days of average American petroleum consumption, which was 20.5 ml. BPD in 2019, pre-pandemic.

Two issues could result in further volatility in the oil markets:

  • Major oil consumers are coordinating efforts to try to lower high prices, while OPEC+, led by Saudi Arabia, will not budge from its oil production plan; ING said today, "There is a growing risk that when OPEC+ meets next week, it will respond to this SPR release by pausing planned supply increases."

  • SPRs are not a sustainable source of supply; therefore, this market intervention is only a temporary solution, according to Barclays. Last week, Goldman Sachs said the Market has already considered a release of crude from national reserves.

The rift between producers and consumers threatens to set up a fight for control of the global oil market. And, with all this at stake, some are taking matters to decrease prices at the pump into their own hands: Earlier this week, Governor Ron DeSantis proposed $1+ billion in gas tax relief, which will save $200, on average, for a Florida family. The Governor used high fuel prices to make a political statement that will be long remembered as his announcement joined by leaders in the gas and transportation industry in Daytona, FL. Many think Governor DeSantis is spot on because Gas tax relief instantly makes it right back to the customer's pocket. Wawa's Pres. & CEO, Chris Ghetsens, said: "Wawa is supportive of the Governor's action to provide relief for consumers at the pump. Given recent cost increases and supply chain challenges, this initiative will have a positive impact on Florida families".

What's the underlying reason: Like previous oil booms and busts, the rise in gasoline prices is due to a confluence of factors, many of which may seem familiar but have not occurred all at the same time. The most outstanding of these was that following a significant explosion and the shut-down of a Philadelphia-area refinery in 2019, the populous East Coast was left with only four remaining refineries, making it even more dependent on gasoline and diesel imports. Meanwhile, refineries on the Gulf Coast, accounting for nearly half of the nation's refinery capacity, experienced rising gasoline exports as demand for gasoline across the United States flatlined. Then, as the pandemic hit in 2020, world oil demand fell by 30% to 35% in March and April of that year as consumers were ordered to stay home. Oil producers could not cope with the sudden fall in demand. Both crude oil and refined products had to be stored at land-based terminals and on oil tankers; so, in April 2020, when crude-oil prices were at negative $37 per barrel, sellers paid buyers to take the oil away.

And, the most unusual part is that OPEC asked producers from outside to cut production to meet lower demand. Never before had 20+ countries, known as OPEC+, which cut production by 10ml BPD., come together to stabilize the Market. Then, as more were vaccinated, economic recovery around the world began; so, OPEC+, which had cut production by almost 10 million barrels per day, had decisions to make. When should production be restored, and by how much? OPEC+ now closely monitors supply and demand trends trying to avoid a return to April 2020 price levels.

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