Why are gas prices high in the Dayton area? It’s complicated

Credit: Bill Lackey

Credit: Bill Lackey

Sticker shock comes in many forms, but when the price of gas hit $5 a gallon in the Dayton area, it left a number of us wide-eyed with mouths agape.

The general public tends to know a few things about gas prices. Namely, they’re high. And someone, like the sitting President, must be to blame. But as in all complicated matters, there are several reasons prizes continue to climb.

This explanation culls information from several sources in an effort to explain the current state of gas prices.

Why are gas prices high?

That’s complicated but it has to do with supply and demand, speculators, the refusal of the big gas companies to increase drilling, the war in Ukraine and more. We’ll touch on all of those here.

You didn’t mention the President. Isn’t it his fault?

Not directly. Presidents have little control over gas prices. Just ask George W. Bush from when, in 2008, the national gas price average hit an all-time high of $4.11 a gallon, according to the US Energy Information Administration, which tracks gas prices weekly. The price of gas actually tripled during his time in office (it was as low as $1.40 a gallon). Democrats then tried to gain political points by blaming Bush. They were as wrong then as Republicans are now. And, on an inflation-adjusted basis, gas prices were still higher under Bush than they are under Biden. Gas averaged $4.86 for the week of June 6. According to the Labor Department’s CPI Inflation calculator, gas would need to average $5.64 a gallon today to exceed the price under Bush.

You said not directly. What about indirectly?

Yes. Biden has an icy relationship with Saudi Arabia, even calling for it to become a pariah state during his campaign. That’s not going to convince the Saudis to increase crude production, which could (not guaranteed) result in lower prices at the pump. Biden has changed his tune and plans to travel to Saudi Arabia in an effort to repair relations, and maybe get some more oil flowing. Biden suspending federal oil and gas drilling didn’t comfort private industry which foots the bill for new oil and gas operations. Investopedia notes that drilling is a time-consuming and expensive process. It could take four months and $160 million to drill one well, plus another month to get the gas refined and transported to stations so it can get into cars.

Bottom line: Even if the Saudis pump more oil and companies start to drill (unlikely, see why below), gas prices won’t decrease significantly.

Credit: Sue Ogrocki

Credit: Sue Ogrocki

Yeah, but if Biden had allowed the drilling of federal land prices would be much less

Here’s the thing. Biden allowed more federal drilling permits in his first year than former President Donald Trump did in any of his first three. According to a CNN’s analysis of Bureau of Land Management drilling permit data, the Biden administration approved 3,537 drilling permits in the first year of his first term, more than the Trump administration granted in any one of its first three years (Trump approved 5,367 permits in 2020, CNN said.) It is true Biden tried to stop federal drilling, but a judge blocked the order, so that’s back on again.

But it’s still Biden’s fault because he stopped the Keystone XL Pipeline

No. There’s a legitimate policy discussion on Keystone XL, but the pipeline was only 8% complete when the developer stopped the project after Biden reversed the Trump administration and revoked approval. Remember, Keystone has been a political football for a decade. Even when up and running, the pipeline would have carried up to 830,000 barrels a day at its peak, according to the Washington Post, or an increase of less than 1% of all global oil production. Put another way, the United States crude oil production has nearly doubled over the last 15 years and prices are still high for reasons we’ll get to below.

Can’t he tap the strategic oil reserves?

He has, mandating a release of 1 million barrels a day for the next six months, the largest release ever, according to NBC News. The reserve, used in the event of a disruption in oil supplies, holds about 700 million barrels. Experts told NBC that we shouldn’t expect the release to push down gas prices too much — maybe a dime, maybe 35 cents a gallon —because it won’t solve the supply and demand issues.

What’s the impact of the war in Ukraine on gas prices?

The Biden Administration has banned Russian energy imports, which includes crude oil, to punish Moscow for invading Ukraine. So far, Republicans and the public (if you believe the polls), agree with the decision. Russia was the world’s No. 2 exporter of crude oil before the embargo, at 10.78 million barrels a day and 11% of the world’s total, according to the EIA. The U.S., in 2021, imported about 209,000 barrels of crude oil from Russia daily, an amount that experts told the Associated Press the United States can cover. But markets don’t like uncertainty, and that could impact the price of crude in the markets.

So why are prices rising?

A number of factors. The pandemic reduced the demand for gas and prices crashed. When the pandemic subsided, more people hit the road, flew on planes, and booked a cruise, but supply couldn’t keep up with demand. We’ll talk about why in a minute.

If we need more supply, companies should just drill more.

It’s not that easy. Energy companies got burned during COVID-19. They remember when crude prices turned negative and traded at minus-$37 a barrel. In other words, the world produced so much oil producers were actually paying buyers to take it. The five so-called “Big Oil” companies — ExxonMobile, Shell, BP, Chevron, and Total — posted a combined loss of $76 billion in 2020. It is true that oil companies posted profits in 2021 and continue to do so this year. But it’s not enough to convince them to drill and increase supply, which could help reduce prices but also threaten bottom lines.

Take ExxonMobile. The oil giant announced, in a press release, it made $8.8 billion in profits in Q1 2022 — more than triple the $2.7 billion from a year earlier. But buried deep in the release, the company noted it would spend $30 billion on a stock buy-back plan, which props up the share price and investor dividends.

Events of 2020 are still fresh in their minds, and investors don’t want to suffer those sorts of losses they did then. A report by the Federal Reserve Bank of Dallas notes investors want companies to focus on paying down debt and returning dividends to shareholders — much like ExxonMobile is doing — and not worrying about the price at the pump.

Additionally, Investopedia notes that oil producers have built only one new oil refinery per decade, and the ones in production operate at 90% capacity, with excess capacity saved for future needs.

The companies have the money and the capacity. They don’t want to drill and we can’t make them.

When will gas prices decrease?

Who knows? Crude oil is a global commodity with its price set by the markets. Let’s take a look at some numbers. The United States produces 14.5% of the world’s crude oil, or about 11.6 million barrels a day, and consumes 18.88 million a day, or 20% of the world’s consumption, according to the EIA. That means companies still have to import oil to meet the rest of our demand. We pay the same price, on a per-barrel basis, as anyone else.

The U.S. doesn’t set oil prices, the commodities market does. Just as we mentioned that crude once went negative, the markets have now set the price at about $120 a barrel. (Crude hit $184.94 in 2008, the highest recorded, under President Bush).

In other words, gas prices might be high for a while?

Maybe. Maybe not. Even if the White House decided to kiss and make up with the Saudis, reversed its energy policy and made the oil industry more comfortable (not likely), those measures aren’t enough to bring prices down. Neither impacts the other market drivers — supply and demand, speculation through futures, and companies’ unwillingness to dig. We haven’t even talked about the different types of oil, processing, the increased demand in developing countries, and other issues.

There’s not just one thing that controls the price of gas.

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