Gasping at the Price of Gas

Filling up my SUV with gas over the weekend – the pump stopped at $100.00.  While this transaction was done, I was not. I replaced the nozzle, drew another credit card from my wallet and started phase two of refueling, which was a much more palatable $27.12*.  As I recall, when I first got my driver’s license, I could get lunch and fill up my tank with a $20 bill.  Thinking to myself - how can a young person now afford to get gas?  One tank today would have cost me an entire paycheck at my part time job during high school.  Then again, I was making $4 an hour back then.  I might be showing my age.

So, what’s driving up the price of gas and what impact will it have on the US economy?

Very basically, the price of crude oil is the most significant driver of gas prices, but like most things it’s more complicated.  On average, the price of oil accounts for only about half of the price of gasoline.  The rest of the cost comes from Transportation & Retail (~18%), Taxes (~17%) and Refining (~12%).  Crude oil prices are determined globally and like all commodities (and many other things), it is all about supply and demand.  While the United States is the world’s largest producer of oil, we still depend on supply from other countries.  Unfortunately, a few oil-rich countries banded together to create the Organization of Petroleum Exporting Countries (OPEC).  One objective of OPEC is to influence (read limit) the global supply of oil.  The US also has a capacity limitation in the refining process taking crude oil to gasoline.  Add in the Russian conflict (we used to get ~8% of our oil from Russia) which is ultimately another factor limiting supply.  This is how we got to where gas prices are today.

Let’s break this down to see the cost to the average US consumer.

The typical American driver covers 14,263 miles per year and the average gas milage in the US for new cars (2020 model year) is 25.4 miles per gallon. Nationwide, the average price per gallon of gasoline is $4.63 (March 2022).  This amounts to the average US driver using about 562 gallons of gas costing nearly $2600 annually.  For comparison, at $3.00 a gallon driving the same miles annually (14,263) and getting the same 25.4 mpg they would spend $1686 over the course of a year on fuel.

Certainly, there are big differences in how many miles each of us drive annually and our vehicles fuel efficiency- my 2004 SUV is barely hits 20 mpg going downhill!  I don’t want to downplay the importance of ~$900 to anyone over the course of a year.  While this is a headwind for US economic growth, it wasn’t too long ago (2011-2014) when oil prices averaged $100/barrel and gas was consistently around $4/gallon.  We can confidently say that the average US individual has a stronger balance sheet today than they did in 2011-2014.

Whenever there is a shortage of supply, ramping up production occurs.  But it will take time.  Oil is quite literally a liquid market, so eventually additional oil and refining capacity make its way to the market and prices will adjust.  People too will adjust to higher prices by possibly driving a little less, carpooling, working remote when possible, selecting a more fuel efficient or electric vehicle, but this process will take some time.

*At the time of writing this, 3/25/2022 gasoline was $6 a gallon in Southern California.


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