How Long Will The Era Of $5.00 Gasoline Last?

A radio host asked me this week how long I thought the era of $5.00 gas at the pump would last. I replied that it would likely last as long as it takes for the price to rise to $6.00 per gallon. It was not a facetious reply.

AAA reported Thursday morning that the average national U.S. price per gallon of regular gasoline had reached a new record high of $4.97, on the verge of topping the $5.00 mark for the first time in the nation’s history. Whether the crossing of that key threshold happens on Friday or over the weekend, it will inevitably happen soon.

As always, high prices for crude oil on the global market are a key driver of these rising gas prices. On Monday, analysts at Goldman Sachs raised their projection for the international Brent crude oil price for the 3rd Quarter from $125 per barrel to $140. Both Citibank and Barclays also raised their crude price projections for the remainder of this year into 2023 on the same day, as Russian oil volumes continue to disappear from the market in the face of Western sanctions. Meanwhile, Natasha Kaneva, JPMorgan’s head of commodities research predicted this week the average gas price at the pump could rise as high as $6.20 by August.

Although gas prices are currently at nominal all-time highs, the previous high of $4.14 set in 2008 would equate to more than $5.50 when adjusted for inflation. But psychological landmarks can be as important economic ones, and we must wonder if seeing a price at the pump in excess of $5.00 across the nation will provide a psychological impact on consumers that could trigger an onset of demand destruction that would lead to falling crude oil and gasoline prices.

Few signs in the current market point to that taking place. Crude oil markets remain under-supplied despite the Biden administration’s ongoing program to add 1 million barrels of oil from the Strategic Petroleum Reserve each day. That program began on April 1 and the plan is to continue it through the end of September, after which Biden’s government would be obligated to start taking oil off the market to refill the SPR, thus aggravating an already tight market situation even further barely a month before the mid-term elections will take place. A classic example of the foibles of government central planning if there ever was one.

At the same time, China began lifting many of its ‘zero-COVID’ lockdowns and other restrictions in Shanghai and surrounding areas on June 1, a move that is already showing signs of being bullish on global oil prices. The Brent price has risen by 5% since the easing of restrictions was implemented.

The member nations of the OPEC+ cartel pledged at their recent meeting to further raise their daily export targets, but few believe the group as a whole will be able to meet its pledged volumes. The prevailing assessment among analysts is that just two member countries – Saudi Arabia and the United Arab Emirates – still possess any significant excess production capacity, and their remaining capabilities are not nearly enough to rebalance the market. “There is no spigot to turn on to come pouring out oil,” one expert told me this week.

The White House announced at the first of June that President Joe Biden would travel to Saudi Arabia to try to rebuild fractured relations there and plead with Crown Prince Mohammed Bin Salman for more oil production. The move prompted the New York Times to remind its readers that Biden had previously labelled the Saudi Kingdom as a “Pariah nation” related to the killing of journalist Jamal Kashoggi, an act that was allegedly sanctioned and carried out by Saudi officials.

“Saudi Arabia is a critical partner to us in dealing with extremism in the region, in dealing with the challenges posed by Iran, and also I hope in continuing the process of building relationships between Israel and its neighbors both near and further away through the continuation, the expansion of the Abraham Accords,” Secretary of State Antony J. Blinken said shortly after the President’s outreach was announced.

The President himself has remained mute on the subject of the upcoming trip, but his White House spokesperson told reporters last week that Saudi oil production would not be a topic of conversation during the visit. On June 3, the White House announced the trip, which was supposed to take place in June, had been “postponed” to July, leaving many to wonder if the Crown Prince and his government have agreed to host the President at all. Thus, the mixed signals on energy from this administration continue to flow and negatively impact markets.

In the meantime, consumers continue to pay more per gallon every time they fill their tanks with gas, and more for pretty much all consumer goods as even higher prices for diesel fuel raise their cost of transportation. While a few analysts have begun to predict the setting-in of demand destruction that could begin to provide some relief, consumers should be careful what they wish for, given that that market factor is most often accompanied by a retracting economy.

As a result of the convergence of these and other factors, the only reasonable conclusion that can be reached here is that American drivers are in for a long, hot and expensive summer.