Summer Travelers Should Plan For Higher Gas Prices

The price for a barrel of West Texas Intermediate crude oil tested the $70 level on Friday before closing at $69.62. While that is good news for oil producers around the country, it is not good news for vacationers getting ready to take to America’s roads with their families this summer.

But here’s the worse news for you travelers: The price at the pump isn’t likely to go anywhere but up from here.

Here’s why:

  • While crude prices seem high already, the current dynamics in global supply and demand favor them moving higher still. Global demand is recovering so rapidly that the International Energy Agency was forced to revise its pessimistic forecast that crude demand wouldn’t return to pre-pandemic levels until 2023 ahead to the fourth quarter of this year.
  • The deal among the OPEC+ nations this past week to continue the group’s plans to gradually raise its oil exports to keep pace with demand recovery helps to protect against a return of any global glut of supply.
  • The U.S. shale industry continues to amaze many observers – myself included – by exercising a rare level of discipline in its drilling efforts, as both the Enverus and Baker Hughes

    BHI
    counts of active rigs appear to have peaked in late April and have remained essentially static since then. With the number of active rigs still sitting at a fraction of their pre-pandemic levels, the U.S. industry appears determined to avoid another replay of the drilling frenzies that have led to supply gluts and price collapses in the past.

All of these factors and more have analysts at Goldman Sachs sticking with their projection for $80 per gallon Brent prices by late summer. Brent, the prevailing international oil price index, closed Friday at $71.89, so a rise to $80 per gallon would represent more than a 10% increase.

Many elements go into the price for gasoline at the pump, but as a general rule, those retail gas prices do move up and down in a direct relationship with the price of crude oil, from which the gasoline is of course refined. Thus, if Goldman is right and the Brent price does see a 10% increase over the next couple of months, we can reasonably expect the price for gasoline at the pump to rise as well.

Will it be a 1 for 1 increase? Probably not. Assuming the other elements that go into the calculation of the price at the pump – like transportation costs, refining costs and state gas taxes – remain static, then we would expect gas prices to go up by something less than 10%. Unfortunately for consumers, though, the price of the crude oil feedstock makes up 70-80% of the total gas price. Which, assuming Goldman’s roughly 10% forecast rise in the crude price between now and August would translate into a 7-8% increase in the price of gas at the pump.

According to Gasbuddy.com, the current average nationwide price for a gallon of regular gas sits at about $3.05 as of this writing. So, a 7-8% increase in that price would amount to a rise of 21 to 24 cents per gallon and more pain at the pump for summer travelers.

Now, are current gas prices really all that high when compared to previous years? Well, it depends on which year you want to compare them to. If you just look at a comparison to a year ago, the average regular price is more than a dollar per gallon higher today. But that’s not really a valid comparison given the fact that we were in the middle of a global pandemic a year ago today.

A comparison to a much more normal time two years ago is far more relevant, and there we see that current gas prices are significantly higher. The price for regular on June 5, 2019 was $2.79, 26 cents lower than it is today. If prices do rise by another 24 cents per gallon by August, drivers would be forking over half a dollar more per gallon than they did two years ago.

That’s significant.

Now, the landscape of history is littered with the rotting carcasses of people like me who tried to forecast what the price of gas at the pump would be two months from now and were proven to be hilariously wrong in hindsight. But my earlier forecast this year has proved to be disturbingly accurate and the facts as they line up today indicate that rising gas prices for the rest of summer are a likely scenario facing drivers.

You would all be well advised to plan accordingly.

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