Why are US gas prices soaring when America barely uses Russian oil?

Saturday, March 12, 2022
Why are gas prices so high?
Experts say the reason is not cut and dry, they also say more than one thing is causing prices to rise.

At first the West, including the US, exempted Russian oil and natural gas from the sanctions they levied. The Biden administration reversed course on that on Tuesday, banning Russian oil and other fuel imports to the US, while the UK said it will phase out Russian oil imports by the end of the year. (The EU is in a tougher spot on this, because they're far more dependent on Russian oil.)

But the initial lack of formal bans didn't really matter in terms of prices anyway. There's been a de facto ban on Russian oil since the invasion began, with most of the country's supply sitting unsold.

That's because oil traders are incredibly nervous to touch the stuff. There's a ton of uncertainty about buying Russian oil, whether it's about the ability to close deals given the sanctions on Russia's banking system, or finding tankers willing to go to Russian ports amid shipping dangers in the war zone.

Skyrocketing gas prices have fueled an even greater demand for electric vehicles. Southern California dealers specializing in electric and hybrid cars say better fuel economy just isn't cutting it anymore.

As a result, the main type of oil that Russia exports into Europe is being offered for sale at a major discount because nobody wants it. JPMorgan recently estimated more than 4 million barrels per day of Russian oil has been effectively sidelined.

So investors are essentially pricing oil as if Russia's supply isn't available at all. And again, less supply = higher prices.

Why can't other countries pump out more?

Good old Covid strikes again. Nobody wanted oil in general in spring 2020, when global stay-at-home orders meant nobody needed to gas up and get to the office. With demand cratering, oil prices did too - even briefly trading at negative prices.

In turn OPEC+ heavily cut production to support prices. And they've kept production targets low since then, only gradually adding back production, even when demand for oil and gasoline bounced back sooner than expected.

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Guess who's part of OPEC+? Russia. So yeah, OPEC+ isn't rushing to the rescue. The Saudis have made crystal clear for months, even before the invasion, that the group doesn't plan to open up the oil taps anytime soon.

That iron resolve may or may not be cracking, however. In one confusing development this week, the United Arab Emirates' ambassador to Washington told CNN that the country wants to increase oil production and will encourage its partners in OPEC+ to do so. But later the UAE's minister of energy and infrastructure tweeted that the nation will stick to its OPEC+ agreement and gradually raise production.

And then, the Iraqi oil ministry said its leaders met and agreed its OPEC+ partners should balance supply and demand to stabilize the market. At this point, who knows.

Why can't US oil companies ramp up production, then?

Russia was the No. 2 oil producer in the world in 2021, pumping out 9.7 million barrels a day - but the US is No. 1 with 10.2 million. American companies don't abide by those OPEC-style, nationally mandated production targets. But US oil producers can't or won't fill the supply gap, even though they could make a mint given the high prices and demand.

Again here, Covid strikes. Like many industries during the pandemic, oil producers are struggling to find staffers and source specialized equipment. Meanwhile, US oil companies are still smarting from the pain of that major oil bust in 2020, which kicked off a flurry of bankruptcies. Major oil companies' stock performances have lagged the broader market since then too. And as makers of fossil fuels, they're wary that future environmental policies could hurt future demand for oil.

All of the above underscores how oil and gas prices are tied to geopolitical events, the pandemic, drilling logistics and so much more. And it adds up to average US gas prices above $4.33 a gallon as of Friday.

In short, it's all a simple case of supply and demand. But of course it's never really so simple.