A problem for the fuel business and consumers – why prices are so high

A sign at a gas station in San Mateo County, California, on May 10, 2022 shows the price of gas.

Liu Guangguan | China News Service | Getty Images

The rise in gasoline prices is impossible to miss and is at the top of consumers’ minds as large billboards announce that gas prices are now $ 4, or $ 5, or even more than $ 6 per gallon in some places.

With prices at record highs, Americans are immediately feeling the effects of the pump. But higher fuel prices are also a headwind for the larger economy, only costing consumers less. Rising fuel costs – especially diesel – are affecting everything from trucks, trains or ships.

Fuel costs are a major contributor to the decade’s high inflation numbers, with prices of all kinds of goods and services appearing higher.

“Energy, in a way, is wagging its tail here,” Rapiden Energy Group President Bob McNally told CNBC’s “Power Lunch” on Wednesday.

“Diesel is really an economic fuel. It’s the lifeblood of the economy, transportation, energy in some cases … so it’s really embedded in economic activity and it’s filtered through a lot of products and services.”

Why is the price of fuel so high?

Thanks in large part to the rise in gasoline prices and the rise in oil prices. Russia’s attack on Ukraine is the latest catalyst for higher crude oil prices, but prices are already rising ahead of the war.

Even before Kovid, under the pressure of lower prices and the demand for higher returns from institutional shareholders, power producers reduced investment and less profitable projects.

Producers then further reduced output during the throes of the epidemic, when the need for petroleum products fell from a hill. People weren’t going anywhere and businesses were closed, so little fuel was needed. Demand fell so sharply that West Texas Intermediate crude, the benchmark for U.S. oil, traded in negative territory for short.

Since then the economy has revived, production has revived and people are driving and flying again. This has led to increased demand and a growing tight oil market at the beginning of last fall. In November, President Joe Biden tapped the Strategic Petroleum Reserve in a concerted effort with other countries, including India and Japan, to try to calm prices. But the relief was short-lived.

Russia’s subsequent invasion of Ukraine in late February has already led to a slump in fragile energy markets.

On March 7, 2008, US oil prices peaked at স্ত 130 a barrel. Russia is the world’s largest exporter of oil and commodities, and the European Union relies on it for natural gas. The United States, Canada and others banned Russian oil imports immediately after the attack, with the European Union saying it could not do so without harmful consequences.

Now, the bloc is trying to hammer out a sixth-round embargo against Russia, which includes oil, even though Hungary has pushed them back.

Oil has since retreated from its post-attack height, but is still firmly above $ 100. In that context, the price of a barrel of crude oil was brought down to 75 75 in early 2022, from around $ 63 at this time last year.

The rapid rise in oil and hence fuel consumption has become a headache for the Biden administration, which has called on producers to pump more. On the one hand, oil companies are reluctant to drill with the promise of capital discipline to shareholders. Executives, on the other hand, say that even if they want to pump more, they can’t. They are facing the same problems that are plaguing the economy as a whole, including labor shortages and rising prices of parts and raw materials such as sand, which is the key to stopping production.

Oil prices make up more than half of the final cost for a gallon of gasoline, but that’s not the only reason. Taxes, distribution and refining costs also affect prices.

Limited purification capacity has begun to play a larger role. Refining is the main step that crude oil uses in petroleum products consumers and businesses every day. From the epidemic, especially in the Northeast, how many barrels of oil can be refined has decreased.

Russia, meanwhile, has been hit hard by sanctions on petroleum products exports from Russia, leaving Europe looking for alternative suppliers. Refineries are running at full capacity, and diesel cracks are spreading – the difference between the price of refined oil and the price at which they sell their products – is now at record levels.

All this is increasing the price of gas. The national average for one gallon of gas hit $ 4.589 on Thursday, up from $ 3.043 at this time last year, according to the AAA. Numbers are not adjusted for inflation.

Each state is now averaging over $ 4 per gallon for the first time on record, while the statewide average in California is now above $ 6.

Diesel prices are also on the rise. On Wednesday, retail diesel prices hit an all-time high of 5,577 per gallon, 76% higher than last year.

Families are now shelling out $ 5,000 a year for gasoline, up from $ 2,800 a year ago, the firm said, according to Yardney Research.

How are fuel prices affecting companies?

Demand for this specialty has grown significantly as a result of recent corporate scandals. Higher prices on pumps mean less money in the pockets of consumers. This means increasing costs for companies, some or all of which will go to consumers later.

Target is one of the high cost companies. Shares of the store chain traded 25% higher on Wednesday – the single worst day since 1987 – following the target earnings results, at which point it warned of inflationary pressures.

“We didn’t anticipate the rapid change we’ve seen in the last 60 days. We don’t anticipate the way transportation and freight costs will rise as fuel prices rise to an all-time high,” said Target CEO Brian Cornell. The company’s quarterly earnings call was issued on Wednesday.

He told CNBC that higher fuel and diesel consumption would increase costs by about $ 1 billion in fiscal year and “significantly increase” [Target] I didn’t expect that. “

Walmart executives have made similar comments. “[F]Doug Macmillan, president and CEO of Walmart, said during the retailer’s first-quarter earnings call on Tuesday, “Yuel’s costs have accelerated to a faster quarter than we were able to outperform them, creating a one-time problem.” We are the United States of America, more than forecast. “

Tractor supply executives noted that domestic and imported freight costs have increased “substantially” compared to last year, and they expect this trend to continue throughout 2022.

The cost of shipping a foreign container has more than doubled compared to the pre-epidemic rate, and the cost of fuel is about one and a half times higher than a year ago, “Amazon noted in its quarterly update.

Monster Beverages executives say the company has “significantly increased sales costs compared to the first quarter of 2021, mainly due to increased freight rates and fuel costs.”

The airline industry is also feeling the effects, especially on the east coast – of rising jet fuel prices.

Southwest Air noted that it had seen a “significant increase in market jet fuel prices” in the last quarter, when United CEO Scott Kirby told CNBC that the airline would cost $ 10 billion more than in 2019 if today’s jet fuel prices were maintained.

Bob Bisterfeld, CEO of CH Robinson, outlined this: “The challenge we face is the rising cost of diesel fuel and the record costs that have had such a huge impact on overall freight prices,” he told CNBC’s “Closing Bell” on Wednesday.

To put the wave in context, he said a carrier would now have to pay about $ 1,000 more in fuel costs than it did last year to move a shipment from Los Angeles to the East Coast.

“This is a real pressure on inflationary spending,” he said.

Is there any relief in sight?

Looking ahead, experts say that the destruction of demand, or the level at which high prices affect consumer behavior, may be the only thing to curb rising gasoline prices.

John Kildoff, a partner at Again Capital, said the card has a national average of $ 5 for the busy driving season between Memorial Day weekend and the fourth month of July.

“It appears [the national average] He was speaking on CNBC’s “Squawk on the Street” on Wednesday. “Last week we saw that the demand for petrol usually increased at the summer-type level … there is more to the contrary,” he said.

Despite the high prices, Kildoff points to two main reasons for the increase in demand: rising demand after the epidemic and a strong labor market, which means people have to pay for what they get to get their jobs.

Andy Lipo, president of Lipo Oil Associates, on the other hand, said he believes the national average will be between $ 4.60 and $ 4.65.

He noted that the sell-off in stocks has led to lower petrol futures, which could lead to some temporary remedies for customers at the pump.

But petroleum is also used in a lot of consumer goods, especially plastics, which means that even if gas prices temporarily cool, higher oil prices could increase costs in the economy.

Rapidan’s McNally says at the moment that it will take a slowdown to curb commodity inflation. “It simply came to our notice then [gas prices] Just have to go higher, because there is no sign of real demand capitulation yet … they will go even higher until it happens, “he said.

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