By Taylor J. Kovar – CEO/Founder, Kovar Wealth Management
–Hi Taylor – I am very happy to finally be paying less for gas after a rough couple of months. Do you know what exactly changed? It feels like prices ramped up and then came back down without any obvious shift in policy or world events, but maybe I’m missing something. – Melissa
–Hey Melissa – I agree! A trip to the gas station feels a lot better now than it did a few months back. It’s also true that the price drop has come without a singular, identifiable catalyst, mostly because a lot of factors play into the cost of fuel. As much as certain people want to place blame and take credit for what you pay at the pump, it’s not always that black and white.
1. Supply. First and foremost, oil is a global commodity. In the U.S., we produce a ton of the stuff, but we import even more. There are fifteen different nations in OPEC producing crude oil, and those member countries have more of an impact on global prices than anything any American politician could say or do. If you look at a timeline of 2022, prices ramped up right after the invasion of Ukraine and the subsequent sanctions imposed on Russia. That’s because the global supply took a hit, and gas companies had to raise prices in response. Again, not the only factor but a clear marking point for when gas started getting more expensive.
2. Demand. Summer is always a pricier time for gas because travel goes up. That includes air travel, and every flight burns through a ton of fuel. When we couple the facts that the global market was squeezed for supply and global demand was still high, it’s no surprise that the average price per gallon went up to $5. What happened next? Travel hit its peak, and then people started hunkering down. At that point, a gallon of gas was expensive enough that people actually altered their behavior to drive less and spend less. Demand dropped, and prices followed suit.
3. What’s next? It’s great that prices dropped, but there’s no guarantee the trend will continue. Hurricane season can really disrupt U.S. production and create another price spike. International conflicts still have a say in what we pay at the pump, and inflation and supply issues affect the refineries’ operating costs which in turn affect your wallet. The good news is that the dollar is strong right now, and a strong dollar always bodes well in the global commodities market.
The price jump from earlier this summer was definitely a confluence of issues, and any price reduction is because of multiple factors as well. Whatever those factors may be, let’s hope the cost of gas keeps moving in the right direction. Thanks for the question, Melissa!
