As with everything else in America, if you don’t like something, politicize it. Over the last couple of months, we’ve seen some sharp increases in gasoline and diesel. While it’s easy to try to blame an individual for those increasing costs, it’s really the fundamentals that are driving those increases. Here are some key items currently at play.
- The winter storms that struck the middle of the country during February are the key driver. The deep freeze took many Texas production and processing facilities offline. Once shut down, it can take time for the processing plants to come back online, and Texas supplies refined petroleum products to a large chunk of middle America.
- A large container ship ran aground in the Suez canal. This shipping lane is an important shortcut for the transit of crude oil. Until the blockage is cleared, market will remain nervous.
- As the COVID-19 vaccination campaign picks up steam, the global economy will begin to improve. Almost everything we do requires energy, and as the economy improves, we will need more of it.
- And, as of yesterday, North Korea is again launching missiles. Any threat of war will drive up the cost of crude.
During the pandemic, oil prices were also artificially low as production and inventories continued to exceed demand.
- There were large amounts of oil that had been produced and were in transit to end users. The pandemic lockdowns were enacted on short notice, and excess inventories quickly piled up. You might remember all the news about the negative price of oil, but that was related to short-term storage issues and they way oil futures are bought and sold.
- Oil contracts often require a set level of production. In some areas, producers either had to keep producing oil, even when it cost more to produce it than they could sell it for. If they didn’t do this, the leases on those wells could be lost.
- In areas like Canada where oil is produced from tar sands, some producers heat up the ground to liquify the crude. The process to get the oil flowing can take months or years. It’s cheaper to keep producing at a loss than to stop and then start over again down the road.
When more oil is produced than we need, prices will fall. They did.
History has also shown that energy prices are always quick to increase when there are any supply disruptions, and then they will be slow to come back down.
Looking at gas prices, the recent spike has just gotten us back to where we were prior to the pandemic, and nowhere near the levels we saw prior to the great recession of 2008/2009.
The other interesting statistic to look at is U.S. production of oil. In 2008, we were only producing about 5 million barrels of oil a day. Even during the height of the pandemic, oil production never dipped below 10 million barrels per day, and it’s already starting to rebound. In 2020, daily usage in this country was approximately 20 million barrels a day, so we are now producing half of what we need.
Most business owners should understand supply and demand. As the planet recovers from the pandemic and demand increases, so will prices. With oil, there is an upper limit for what can be produced on a daily basis, and this amount is relatively close to what is used each day (on a global scale). When we reach the tipping point where global demand exceeds production capacity, that is when we will really see large price increases, or consumers turning to other forms of energy such as wind and solar.
It is interesting to point out that with half of our oil produced domestically, rising prices for crude directly benefit American workers and companies. With a large percentage of products that Americans use being produced outside of this country, crude is one way that people can truly “buy American”. Ultimately, energy is a zero-sum game. Regardless of whether fuel is cheap, or expensive, there will be winners and losers on both sides.
As far as the Powersports, Marine, and RV industries go, I’ve never seen any research that correlates to when rising fuel prices will cause consumers to scale back their use of these vehicles. Back in 2008, right before the recession, as premium fuel approached the $5 mark we saw unprecedented demand for motorcycles . Factoring in inflation, $5.00 a gallon fuel in 2009 would be $6.11 in 2021.
If history is the best indicator, then all we know is that at some point in the future, oil will be cheap, and that at another point in time, oil will be expensive. Strap in and enjoy the ride.
#Oil #Crude #Diesel #Gasoline