Rising Gas Prices: Cause and Effect

Posted by: Dale Buckner

Why are gas prices so high and what will that do to the economy? It’s a question we're seeing more and more often as gas prices continue to rise. The answer is complicated and it's hard to say when things will return to "normal," however we can give you a little bit of information.

The reason for high gas prices cannot be put solely on the high cost of oil. The American Automobile Association says the price of oil at about 55% of the reason behind the current price of gas. So, while oil prices are a large factor, it's really only about half the story. The rest of the price comes from supply, demand, taxes, and some other factors.

During the pandemic, gas demand diminished as more and more people opted to stay home rather than travel. As a result, the supply of gas declined to meet the lessened demand.

Now, as more people return to a lifestyle that resembles pre-pandemic times, demand for gas is drastically rising and the supply hasn't yet caught up. All of this contributes to higher gas prices.

However, there's still that 55% that is the result of oil costs. The price of oil is driven by global supply, demand, and speculation. All of which have been influenced by Russia’s invasion of Ukraine. Russia is one of the largest producers of oil in the world, and while the U.S.'s oil supply is not dependent on Russia, Russia does account for 8% of the global supply. 

Heavy economic sanctions have largely cut off Russian oil exports. This means a sizeable chunk of global oil is no longer accessible, which drives up the cost of oil across the globe and therefore also drives up the global cost of gasoline. 

As you can see, gas prices can quickly get confusing with so many factors at play.

As for the second part of the question: What does this mean for the economy? Well, it isn’t exactly clear how much gas prices will affect the economy.

Gasoline makes up a small portion of consumer spending – roughly 2.6% according to Reuters. That means that higher spending on gas doesn’t have a significant impact on overall consumer spending. But higher fuel prices typically mean less travel, which affects airlines, hotels, and tourism. It also makes production and shipping costs higher.

Honestly, it’s mostly a guessing game as to how much these high gas prices will affect production. At a time when shipping and transport are already backlogged no one knows what the impact will be.

However, our biggest concern here at Dale Buckner, Inc. has and always will be how this is affecting you. Has it changed your plans or income needs? Please let us know if there is anything my team and I can do for you. If you need anything from us, please give us a call at (806) 358-7977. We're always here to help.