- The average price for a gallon of gas in the US is $3.88 and climbing.
- Prices typically fall after summer, but supply cuts in Russia and Saudi Arabia are causing a crunch.
Don't look now, but gas prices are soaring again, and they may keep rising. The good news is that there appears to be some relief coming.
AAA reported this week that the average price for a gallon of gas in the US was $3.88. However, drivers in 11 states are paying more than $4 a gallon on average, including parts of California, where costs can be above $6.
That's bad for several reasons, including the potential for a surge in inflation. Mohamed el-Erian, the chief economic advisor at Allianz, recently said on X, formerly Twitter, that surging gas prices were one of the reasons some worried about an inflation "smile," where it falls, levels off for a bit, and then starts moving back up.
But what may be top of mind for many Americans in the short term is spending more at the pump, which means they have less money to spend elsewhere. And what the US economy doesn't need right now is Americans tightening their budgets after their summer of fun.
An atypical spike in prices
The increase in gas prices is unusual, as we typically see some relief after the summer surge as demand wanes. But the average price is $0.20 more per gallon than at the same point last year ($3.68 a gallon), and it's $0.30 higher than on Memorial Day ($3.58 a gallon).
Meanwhile, any dip in demand caused by the seasonal change has been offset by Saudi Arabia's and Russia's cuts in production. Prices have also been influenced by the tragic flooding in Libya. Several ports in the OPEC nation are temporarily unavailable, disrupting its export of oil, which was at 1 million barrels a day before the disaster.
The cuts by Russia and Saudi Arabia have been extended through December. Libya's oil minister, Mohamed Oun, supported the move, telling Reuters it would have a "positive impact on market balance between global producers, consumers, and on global economy."
So while oil is $90 a barrel for the first time this year, there's now fear that the price will keep rising and reach $100 before the end of the year.
"These bullish moves significantly tighten the global oil market and can only result in one thing: higher oil prices worldwide," Jorge León, a senior vice president at the research firm Rystad Energy, wrote in a note seen by Insider.
Not helping matters is that the US Strategic Petroleum Reserve is near a 40-year low. The Biden administration unloaded 180 million barrels last year to help counter the price surge following the Russian invasion of Ukraine. With fewer barrels in reserve, there's now less oil that the US can release into the economy and help increase supply and thus lower prices.
Now the US wants to refill the Strategic Petroleum Reserve, but the government is facing another round of price hikes at the pump and a lot less in its reserve to help. If the US fills the reserve too quickly, it will have a big impact on lowering the available oil supply and prices will likely go up again.
But there are reasons to believe this pain at the pump is temporary
Chevron CEO Mike Wirth is among those who think we're heading toward $100 a barrel, but he's confident that the economy is healthy enough to withstand it. If true, the worries about the impact of rising gas prices on consumer spending and inflation are overblown.
"It will have some effect on the economy, but we've had relatively higher oil prices here now for most of this year and certainly all of last year, and the recession that everyone's been talking about hasn't arrived," Wirth told Bloomberg. "So I think the underlying drivers of the economy in the US and, frankly, globally remain pretty healthy, so I think it's a drag on the economy but one that thus far I think the economy has been able to tolerate."
David Kelly, the chief global strategist for J.P. Morgan Asset Management, said that supply and demand were both moving in the right direction to bring prices back down in the near future.
"We're currently producing more crude oil than either Russia or Saudi Arabia." Kelly said on CNN's "Before the Bell." "This is going to be a record year for US liquid-fuel production, and next year is going to be even stronger. The global economy is growing slowly, and that's going to limit demand growth for fossil-fuel energy. And frankly, the green-energy transition is also limiting the growth in demand."
Meanwhile, Citigroup analysts said prices could still go up in the short term but called $90 "unsustainable" because of increases in supply outside the OPEC nations outpacing any growth in demand. They're predicting prices to come down to $84 a barrel before the end of the year and even to the low $70s in 2024.
In recent years, with oil prices closer to $70 a barrel, gas prices have typically been close to $3 a gallon.
Like Kelly, Citi's global head of commodity research Ed Morse and his team wrote to investors, via CNN, that US production continued to grow and add to the oil supply. In addition, Brazil, Canada, Venezuela, and Guyana have also upped their production, which should bring a sense of relief to drivers in early 2024.