Every time we fill up a vehicle or our on-farm tanks, we notice the price a little more. And for good reason. Since May 2020 – worst of the Covid shutdown, national retail prices have nearly doubled. Of course, last May, many of us weren’t going anywhere, whether for pleasure or work. But it turns out higher gas prices are the result of a number of perfect storms, literally.
To begin with, the demand collapse stopped drilling in its tracks. Few oil producers can survive $16 oil for long. Tight oil from fracking saw the same drilling halt, but curiously output from fracking did not fall as far as expected. The industry overlooked the large number of wells already drilled but not fracked or producing. So domestic supplies were reduced but not as sharply as other energy supplies. Although tight oil has reduced us to very low net imports, OPEC+ is still trying to keep prices as high as as possible, affecting world demand, and world prices impact US oil prices.
The pandemic almost overnight sharply reduced demand, and as farmers well know, a 10% drop in demand, for example, rarely produces just a 10% reduction in prices. So as inventories began to mount, gas was cheap. There were other factors. The Texas freeze crippled much of our refining capacity which took months to come back on line. Hurricanes, especially Ida, shut down oil production in the Gulf. Turning that oil into gasoline became trickier. Although gasoline inventories, shown in gold, were not terribly far from average, they weren’t in the right places, and transporting anything since the pandemic was and is problematic.
But if the pandemic caught us off guard, the rapid demand recovery did the same. With an enormous savings in the bank, American consumers took back to the road, while refiners and producers were still repairing the system. Now throw in bottlenecks we didn’t know existed, like trucker shortages and possibly permanent commuting pattern changes. I’m amazed gas is as available as it is, at prices we don’t like but we’ve seen before.
Finally, for fuel, like many other industries such as say, fertilizer just to pick one at random, strong demand and market uncertainty presented an opportunity for sellers to recover some lost profits from 2020. Luckily fuel prices, excluding crop drying are a relatively small factor in overall costs of farm production.
It is hard to point to government policies that would have been able to prevent this web of events, but I doubt that will stop us from trying.
