With these crazy gas prices, it may be a surprise for many when they may have to change summer plans whether one is planning a road trip or purchasing an airline ticket. The Russo-Ukrainian War of 2022 is only a small contributor to rising gas prices. The real reason actually stems back and this article will explain the drivers of increasing gas prices and predictions going forward.
Current Situation and Market Forecast
Since I am a firm believer in visuals, take a look at this chart below:
Per the above chart, we observe continuous gas increases since 1994 to 2021 on a calendar year basis. We have also plotted a linear forecast line; excluding other variables we can see that gas prices are expected to further increase. If we only look at the last 5 years, we see that gas prices have been mainly stable with a decline in 2020 due to decreased travel demands from COVID and a large jump in 2021 due to COVID recovery. As vaccines prove their effectiveness, we can expect 2022 gas prices to continue to increase.
Assuming that the trend above continues and crude oil hits $5/GL, we use the following formula below to determine the gas price per gallon. The formula is derived from basis regression analysis where x is the cost of crude oil per gallon.
Per the formula above, $5/GL of crude oil results in $3.39/GL in gasoline prices. In 2021, the national average gas price was $3.10/GL which represents a 9% increase YoY. Our statistical model predicts with 98% confidence that we may see gas prices hit $3.68/GL! While we haven’t covered this extensively in the article, we also expect petroleum based products such as plastics to also increase in costs due to rising crude oil prices.
What Caused This?
Answer #1: COVID. Because of COVID, oil producers cut back on crude oil production since the demand for travel dropped off a cliff in 2020 from strict lockdown mandates. With most of those restrictions lifted in 2021 and 2022, we are now seeing oil prices increase.
Answer #2: Weather. Believe it or not, the weather is also causing gas prices to increase. Per AARP, we can expect 19 storms in 2022 with 9 of them being hurricanes. In comparison from 1991 – 2020, we’ve only had 14.4 storms and 7.2 hurricanes on average. Ironically as global warming continues to worsen, we can expect more natural disasters and accompanying gas price increases.
It is very difficult to see gas prices coming down unless if we have another event similar to COVID. We may see some leveling out in prices but as society returns to normal from the pandemic, expect to see elevated pricing in the foreseeable future. Happy travels everyone!