Why Gasoline Prices Can Stay Up When Oil Goes Down

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When energy prices surge, there are few places where the pain is felt so acutely as at the filling station. The cost of gasoline for your car or the diesel that powers trucks is driven by a complex mix of Middle Eastern politics, refinery capacity, government policy and, sometimes, war. While Russia’s invasion of Ukraine was the trigger that fired fuel prices to new highs in 2022, it wasn’t the only cause. 

1. Was filling my tank ever this expensive?

Probably not, at least in nominal terms. Nationwide prices in the US briefly surged above $5 a gallon to a record in June. In some places they topped $6, according to American Automobile Association data. Prices also hit records in the UK, where filling an average car cost more than 15% of a week’s earnings in some areas. For emerging economies in particular, there was a double hit, with a surging dollar compounding the already severe impact of higher oil prices. 

After war broke out in Ukraine in late February and the US and its allies announced plans to embargo Russian energy exports, prices of the crude oil that feeds refineries surged above $100 a barrel. Global oil production was already only slowly recovering from Covid-related disruption, with some major producers struggling to increase supply and the US pumping significantly less than before the pandemic. That made it harder to quickly replace Russian oil, leading to supply tensions that inflated fuel prices.  

3. Is that the only reason?

No. The biggest issue was a lack of spare processing capacity to turn the crude oil that was available into consumable fuels. Officials from Saudi Arabia to the US blamed the price surge on a lack of refining infrastructure. Prices rose faster than crude oil and kept on gaining even when crude fell back in June. 

4. Are there any historical precedents? 

In the run-up to the 2008 global financial crisis, refiners were unable to keep up with demand, leading to what industry analyst Doug Terreson described as a “Golden Age of Refining.” Gasoline surged to a then-record above $4 a gallon before plunging as low as $1.62 as the crisis hammered economies. Things look a little different this time around. The recovery from the pandemic has boosted demand for energy while the war in Ukraine is constricting supply. This, combined with the fastest rate of inflation in decades, means there’s more debate about whether fuel prices will stay high in the event of another recession. 

5. Can’t we just make more fuel?

Swaths of refinery capacity shut down during the pandemic and it’s not easy to bring it back online. The US lost more than 1 million barrels a day of capacity between 2019 and 2022 and the remaining plants were already running close to flat out. Some facilities will never restart, even with profit margins near records. The big, multiyear investments needed for such facilities have become tougher to secure as everyone from policymakers to consumers and financiers eye greener alternatives.

Several giant new refineries — long in the planning and construction — are set to come online in coming years, but the effect won’t be dramatic. New plants in the Middle East, China and Africa won’t be enough to balance the markets for jet and diesel-type fuels in 2022 or 2023, according to the International Energy Agency. 

7. What can governments do?

Some have cut taxes or introduced fuel rebates and subsidies to ease the pain for hard-pressed consumers. Mexico’s government was paying out far more in gasoline and diesel subsidies than it was earning in higher prices on its crude exports, according to Bloomberg Economics estimates. In June, US President Joe Biden called for a pause in gasoline tax collections. Economics dictate that if supply can’t be increased, then high prices will end up depressing demand, causing prices to eventually fall. Cutting fuel taxes may be popular, but that could increase demand and therefore help to keep prices high. 

More stories like this are available on bloomberg.com


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