Memorial Day marks the unofficial beginning of summer. School is out and many businesses are closed. As a result, an increasing number of Americans take to the open road, which means a rise in gas prices.
This year, gas prices may not move as high as usual. Then again, they may. It depends on who you listen to.
The price of gas depends on supply. The greater the supply – the lower the price and vice versa.
As a result, futures and options traders and those in the transportation industry are very interested in supply forecasts. You might be too if you plan to take your vacation by car.
Two Forecasts Diverge
The International Energy Administration (IEA) and OPEC offer periodic forecasts of oil supply. This year those projections are headed in different directions.
The IEA sees global oil demand growing by 1.1 million barrels a day. That is down 140,000 barrels a day from its April forecast.
IEA’s forecast reduction was attributed to a mild winter that cut consumption, lower industrial usage, and a decline in diesel car sales.
OPEC’s May forecast stuck with the numbers it published in April. It sees demand rising by 2.25 million barrels per day this year.
What Will You Pay For Gas?
If you filled your vehicle with gas this Memorial Day weekend, you paid, on average $3.59 per gallon, according to the American Automobile Association (AAA).
AAA had speculated that prices could go slightly higher as a result of demand from the 34.8 million drivers it expected to travel over the weekend. However, the price actually slipped a bit lower than Thursday’s average of $3.61 per gallon.
“Since the pandemic, the summer driving season has not seen a surge in demand, which can push pump prices higher,” said Andrew Gross, AAA spokesperson. “So it will be interesting to see if this year bucks that trend. This week’s move by the Biden Administration to sell off the million barrel Northeast Gasoline Supply Reserve might help stave off any regional pump price surges, but likely won’t move the national average that much.”
White House Action
Last week the Biden Administration announced it was releasing one million barrels of gasoline from the nation’s gasoline supply reserve. The move was presented as an effort to hold down gas prices over the summer.
“The Biden-Harris administration is laser-focused on lowering prices at the pump for American families, especially as drivers hit the road for summer driving season,″ Energy Secretary Jennifer Granholm said in a statement.
Release of the one million barrels is targeted for sometime before July Fourth. So, it had no effect on this weekend’s prices. In fact, it will have little impact on summer prices. That is because the price of gasoline is driven by market forces (supply and demand) and there is little short term a president can do about that.
On the campaign trail, Donald Trump is trying to make the oil supply a campaign issue. However, oil production under Biden is far greater than during the Trump presidency. In fact a new record oil production of 13.2 million barrels a day was hit last October only to be topped in February when daily production reached 13.3 million barrels.
Will Gas Prices Rise?
It does not take a crystal ball to predict that prices are likely to rise over the summer. They almost always do.
As referenced earlier, with summer more people yearn for the open road. With the increase in road trips comes an increase in demand. That usually means an increase in gas prices.
However, this year the outlook is slightly less certain.
Some analysts note that the increased use of electric vehicles may have an impact on demand. Conversely, OPEC’s June meeting is expected to announce production cuts. The size of those cuts could boost gas prices.
Other than supply and demand – there is another factor affecting summer gas prices. Just as we shed coats and jackets for short-sleeved garments in the summer, gasoline also dresses lighter.
Oil refiners switch production to summer blend gas in Spring. They do that to limit emissions.
Winter gasoline contains a higher Reid vapor pressure (RPV) than summer blends. RVP evaporates quickly, which helps vehicles start better in cold temperatures. That quick evaporation in warmer months would increase emissions.
The bottom line is that summer gas is more expensive to produce than winter gasoline. Plus, It takes longer to produce summer blends. On top of that, the yield of summer blends is lower than gasoline produced for the winter months.
Other Factors That May Impact Gas Prices
As mentioned earlier, the president does not have the tools to alter gasoline prices. However, there are other factors that can have an effect on what you pay at the pump.
We are currently witnessing one of the main causes of changes in oil and gas prices – global conflict.
Russia’s attack on Ukraine in 2022 pushed gas prices up 42 percent or $1.48 to a record $5.02.
A large reason the increase was so high is that Russia is a major oil exporter.
Speculation can also have an impact on prices. For example, futures traders jumped in to bid up contracts when the Israel-Hamas war broke out in October. Neither Israel or Gaza produces enough oil to have any impact on supply or prices. So, it is difficult to see a rationale for the speculation. Then again, we do not know why Lemmings jumped off cliffs.
Interest Rates
Lastly, interest rates have an impact on all businesses. As a result, the actions of the Federal Reserve (Fed ) in setting rates are a factor. That is why analysts and investors are keeping an eye out for the next Personal Consumer Expenditures (CPE) report set for May 31.
The CPE is the Fed’s favorite inflation gauge. If Friday’s CPE shows a decline in inflation, we could be in for a rate cut. That could hold gas prices down. However, any rate cut by the Fed is not expected until its August meeting, so do not hold your breath.
One final thought. Do not let prices at the pump spoil your fun. Remember what John Steinbeck said about travel – “People don’t take trips, trips take people”.
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