Gas pumps in my Seattle neighborhood already sport $3.999 prices, partly because Washington has the country’s 4th highest gas taxes (67.8 cents combined federal and state; see state-by-state rankings here).
Oil prices obviously affect pump prices, but don’t dictate them. Crude oil is a global market, but gas is sold in local markets, where pump prices are determined by local supply and demand in local markets. (For a deeper dive into what affects pump prices, read this article.)
However, drivers this summer are facing a perfect storm of global and local forces pushing up gas prices. How high will they go?
Back in 2014, Saudi Arabia decided to break the back of the U.S. shale industry by flooding the global market with cheap oil. This created a glut and pushed crude prices below $20. But the effort failed because U.S. shale producers were able to slash their production costs. It did hurt the oil majors’ cash flows to the point where they deeply cut back investments in exploration and development, impairing their ability to meet future demand.
That future is now upon us. The two major crude indexes, West Texas Intermediate and Brent, both broke above $75 last week; and Big Oil CEOs and at least two major banks, Goldman Sachs and Bank of America, see a possibility of $100 oil by next year (see story here).
At the same time, cooped-up Americans finally freed from Covid-19 restrictions are hitting the road in record numbers this July 4 weekend (see story here). In addition, many people are driving instead of flying, partly because air travel is a mess, but also because children aren’t vaccinated yet, so many families are choosing car trips to lessen their kids’ exposure. The end result is high demand for gas.
Getting back to crude oil, if it accounts for roughly half the price of a gallon of gas, then a 25% jump in crude would push that $4 Seattle gallon up about 42 cents, everything else staying the same (which, of course, it won’t).
By that math, even if oil goes to $100, it’s unlikely gas would get to $5, even in high-tax states like Washington and California.
Photo below: This pump has regular at $2.599. Good luck finding that price! Even Texas gas isn’t that cheap. For AAA’s listing of current average gas prices by state, go here.
