Fuel is a problem for businesses and consumers – why are prices so high

A sign displays gasoline prices at a gas station in San Mateo County, California, on May 10, 2022.

Liu Guanguan | China News Agency | Getty Images

The surge in gasoline prices is not to be missed, as large billboards announce that gasoline prices are now $4 or $5 a gallon, and even more than $6 in some places, making it a top priority for consumers.

As prices hit record highs, Americans immediately felt the impact of higher oil prices. But higher fuel prices are also bad for the wider economy, not just lower spending by consumers. Rising fuel costs – especially diesel – mean that anything transported by truck, train or ship will suffer.

Energy costs have been a major factor behind decades of high inflation figures, as prices for various goods and services have risen.

“In a way, energy is the wobbly tail here,” Bob McNally, president of Rapidan Energy Group, said Wednesday on CNBC’s show. “Power Lunch.”

“Diesel is really an economic fuel. In some cases, it’s the lifeblood of the economy, transportation, electricity…so it’s really embedded in economic activity and filtered through so many goods and services.”

Why are fuel prices so high?

The surge in gasoline prices is largely due to higher oil prices. Russia’s invasion of Ukraine is the latest catalyst to push up crude oil prices, but prices were already rising before the war.

Even before Covid, energy producers were cutting investment and less profitable projects under pressure from low prices and institutional shareholders demanding higher returns.

Producers then cut production further in the throes of the pandemic, when demand for petroleum products plummeted. People have nowhere to go and businesses are closed, so less fuel is needed.a sudden drop in demand such that West Texas Intermediate Crudethe U.S. oil benchmark, briefly traded negative area.

The economy has since reopened, manufacturing has recovered, and people are driving and flying again. That has led to a surge in demand and an increasingly tight oil market from last fall.In November, President Joe Biden tapped the Strategic Petroleum Reserve Coordinate efforts Join other countries including India and Japan in an effort to calm prices. But this relief was short-lived.

Russia’s subsequent invasion of Ukraine in late February threw already fragile energy markets into turmoil.

U.S. oil surged to its highest level since 2008 on March 7, topping $130 a barrel. Russia is the world’s largest exporter of oil and products, and the European Union relies on it to produce natural gas. While the U.S., Canada and other countries banned Russian oil imports shortly after the invasion, the European Union said it could not be without adverse consequences.

Now, the EU is trying to finalize a sixth round of sanctions against Russia, which includes oil, although Hungary is one of them.

Oil prices have since retreated from post-invasion highs, but remain firmly above $100. To put this number in context, in early 2022, a barrel of crude oil was at $75, compared to nearly $63 this time last year.

Rapidly rising oil and fuel costs are a headache for the Biden administration, which has called on producers to increase output. On the one hand, oil companies are reluctant to drill after promising shareholders capital discipline. Executives, on the other hand, said that even if they wanted to pump more, they simply couldn’t. They face the same problems as the entire economy, including labor shortages and rising prices for parts and raw materials, such as sand, which are key to fracking production.

Oil makes up more than half of the final cost of a gallon of gasoline, but it’s not the only factor. Taxes, distribution and refining costs also affect prices.

Restricted refining capacity is starting to play a bigger role. Refining is a critical step in converting crude oil into petroleum products that consumers and businesses use every day. How many barrels refineries can process has fallen since the pandemic, especially in the Northeast.

Meanwhile, Russia’s exports of petroleum products have been hit by sanctions, forcing Europe to find alternative suppliers. With refineries operating at almost full capacity, diesel crack spreads — the difference between a refinery’s cost of oil and the selling price of its product — are now at record levels.

All of this is pushing up gas prices. The national average price for a gallon of gasoline hit a record $4.589 on Thursday, According to AAA, up from $3.043 at this time last year. The figures are not adjusted for inflation.

The average gas price per gallon in each state now exceeds $4 for the first time, while California statewide average is now above $6.

diesel price also soaring. Retail diesel prices hit an all-time high of $5.577 a gallon on Wednesday, up 76 percent from the past year.

All in all, families are now paying $5,000 annual gas billThe company said that was up from $2,800 a year ago, according to Yardeni Research.

How do fuel prices affect companies?

The massive demand destruction caused by rising natural gas prices may not have begun yet, but the effects of soaring fuel costs are permeating the entire economy. Higher gas station prices mean less money in consumers’ pockets. It also means increased costs for the company, some or all of which will be passed on to consumers later.

Target is one of the companies struggling with higher costs.Shares of the chain tumbled 25% on Wednesday — its worst day since 1987 — after Target Earnings resultsduring which it warned of inflationary pressures.

“We didn’t anticipate the rapid changes we’ve seen over the past 60 days. We didn’t anticipate that transportation and freight costs would skyrocket as fuel prices rose to record highs,” Target CEO Brian Cornell said Wednesday in a statement. on the company’s quarterly earnings conference call.

He told CNBC that higher fuel and diesel costs will add about $1 billion to the cost this fiscal year and “significantly increase” [Target] did not expect. “

Walmart executives similar comments. “[F]Walmart President and CEO Doug McMillon said on the retailer’s first-quarter earnings call Tuesday that fuel costs accelerated faster than we were able to get through this quarter, creating a timing issue. America exceeded our expectations. Over the course of the quarter, the company made “pricing progress commensurate with cost increases,” Macmillan added.

Tractor Supply executives noted that domestic and import freight costs increased “substantially” last year, and they expect these trends to continue into 2022.

Compared to pre-pandemic shipping rates, the cost of shipping overseas containers has more than doubled, and the cost of fuel is even roughly one and a half times higher than it was a year ago,” Amazon noted in its report. quarterly update.

Monster Beverage executives said the company “has experienced a significant increase in cost of sales compared to the first quarter of 2021, primarily due to higher freight and fuel costs.”

The airline industry is also feeling the impact as jet fuel prices — especially on the East Coast — soar.

Southwest pointed to “a significant increase in market jet fuel prices” last quarter, while co-CEO Scott Kirby told CNBC that if jet fuel prices stayed the same today, the airline would spend $10 billion more than it did in 2019. Dollar.

Bob Biesterfeld, CEO of CH Robinson, summed it up this way: “However, the challenge before us is actually the rising and record cost of diesel fuel, which has such a huge impact on overall freight pricing,” he said on CNBC’s Wednesday. “Shut the doorbell.”

To put the surge into context, a carrier must now pay nearly $1,000 more in fuel costs than last year to move cargo from Los Angeles to the East Coast, he said.

“That’s a real pressure on inflation costs,” he said.

Are there any signs of relief?

Looking ahead, experts say demand destruction or the level at which high prices affect consumer behavior may be the only factors holding back gasoline gains.

John Kilduff, partner at Again Capital, said: $5 National Average During the busy driving season between Memorial Day weekend and the Fourth of July.

“It appears [the national average] It needs to go higher,” he said Wednesday on CNBC’s “Squawk on the Street.” “Last week we saw gasoline demand soar to summer-typical levels … there’s more upside here,” he said.

Kilduff noted that despite high prices, two key factors have spurred demand: pent-up post-pandemic demand, and a strong labor market, meaning people will pay what they have to pay to get a job.

On the other hand, Andy Lipow, president of Lipow Oil Associates, said he thinks the national average will peak between $4.60 and $4.65.

He noted that the sell-off in stocks dragged Gasoline Futures lower, which could result in consumers getting some temporary reprieve when they refuel.

But oil is also used in many consumer goods, especially plastics, meaning even if natural gas prices cool temporarily, costs across the economy could remain high if oil prices stay high.

Rapidan’s McNally said a recession is needed at this point to control product inflation. “It’s not a pleasant prediction. But [gas prices] It just needs to go higher because there’s no real demand capitulation yet … until that happens, they’ll go higher,” he said.

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