As the conflict in the Ukraine continues and economic sanctions intensify against Russia, Americans are feeling the effects at the gas pump. The Energy Information Administration has calculated that as of the week of March 14, average retail gasoline prices have reached $4.315 per gallon, toppling previous highs endured during the 2008 financial crisis.
While incomparable to the suffering in Eastern Europe at this time, the effects of the conflict, specifically on the global oil market, extend beyond the borders of Ukraine. Though western sanctions on Russian oil certainly have an effect on domestic gasoline prices, they are not the sole cause of Americans’ pain at the pump.
Gasoline and oil prices plummeted in May 2020 as COVID-19 lockdowns were enacted across the country and demand for gasoline dropped. In response, U.S. producers and OPEC countries began stalling production in response to such low demand.
As lockdowns have eased and demand for oil and gasoline increased rapidly, producers were late to resume production. This imbalance in supply and demand is at the origin of the situation today.
The next blow to the oil markets, obviously, is the conflict in the Ukraine. Oil is traded on a global market, and because of that, issues in one part of the world can be felt by all oil-importing nations. Russia is the third-largest oil-producing country on the planet, behind the U.S. and Saudi Arabia. Though the United States is the largest producer of oil, it is also the largest consumer of oil, and domestic production fails to meet domestic demand, requiring imports of foreign oil to cover the missing supply. In 2020, imported Russian oil met 8 percent of America’s oil demand. Though less crucial in North America, Russian oil is essential in Europe. Organization for Economic Cooperation and Development (OECD) European member states accounted for 49 percent of Russian oil exports in 2021.
Since the Russian invasion of Ukraine, the U.S. and EU nations have heavily sanctioned Russian oil, while many major oil companies have pledged to no longer purchase Russian oil until the conflict is settled. While devastating to Russian oil and the country’s economy, these actions also caused a spike in global oil prices, which at one point reached over $100 per barrel, but have since dropped with futures indicating that they will continue to fall.
Like many problems facing the world, this one is complex and particularly unfortunate in its timing. The future of oil, natural gas, and gasoline prices are more uncertain today due to the current geopolitical situation.
A recent International Energy Agency report said that energy markets are likely to tighten even further unless major producers increase output, and the oil market will slip into a deficit unless OPEC members increase supply levels. There have been diplomatic efforts to convince OPEC countries to produce more oil. Pressure is also growing on U.S. producers to increase production, but drilling companies have been hesitant to increase capital spending on new wells that may not produce until after the supply has stabilized. Whether these efforts will be enough to reduce prices and help the global economy remains to be seen.