September 29, 2022

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Fuel is a problem for business and consumers – why prices are so high

Fuel is a problem for business and consumers - why prices are so high

A sign displays gas prices at a gas station on May 10, 2022 in San Mateo County, California.

Liu Guangan | China News Service | Getty Images

It’s impossible to overlook the skyrocketing price of gasoline and right in the head of consumers’ minds as big billboards advertise that gas is now $4, $5 and even more than $6 a gallon in some places.

With prices soaring to record levels, Americans feel the impact of the pump immediately. But higher fuel prices are a headwind for the broader economy as well, apart from consumers who spend less money. Rising costs for fuel – especially diesel – mean that anything transported on a truck, train or ship is affected.

Energy costs are one of the main contributors to the decades-old high inflation figures that appear with the rise in prices of all kinds of goods and services.

“Energy, in a way, is the tail wagging the dog here,” Bob McNally, president of Rapidan Energy Group, said Wednesday on CNBC. Energy Lunch.

“Diesel is a really economic fuel. It’s the lifeblood of the economy, transportation and energy in some cases…so it’s really an integral part of economic activity and is filtered through many goods and services.”

Why are fuel prices so high?

The surge in gasoline prices is due, in large part, to the jump in oil prices. The Russian invasion of Ukraine is the latest catalyst to push crude oil higher, but prices were already moving before the war.

Even before Covid, energy producers were cutting back on investments and cutting back on less profitable projects under pressure from lower prices and institutional shareholders demanding higher returns.

Then producers cut production further during periods of the pandemic, when the need for petroleum products receded from a cliff. People were not going anywhere and businesses were closed, so now less fuel was needed. Demand suddenly dropped that West Texas Intermediate Crudewhich is the US oil benchmark, which was briefly traded negative area.

Since then economies have reopened, manufacturing has rebounded, and people are getting to drive and fly again. This led to increased demand, and the start of an increasingly tight oil market last fall. In November, President Joe Biden tapped the Strategic Petroleum Reserve in a coordinated effort With other countries, including India and Japan, trying to cool prices. But the satisfaction did not last long.

The subsequent Russian invasion of Ukraine at the end of February reeled an already fragile energy market.

US oil jumped to its highest level since 2008 on March 7, surpassing $130 a barrel. Russia is the world’s largest exporter of oil and products, and the European Union depends on it for natural gas. While the United States, Canada and other countries banned imports of Russian oil shortly after the invasion, the European Union said it could not be without dire consequences.

Now, the union is trying to crystallize a sixth round of sanctions against Russia that would include oil, although Hungary is among those resisting.

Oil has since retreated from its post-invasion highs, but is still steady above $100. To put this number in context, at the beginning of 2022 the price of a barrel of crude oil was $75, while prices this time last year were closer to $63.

Rapidly rising oil prices and thus fuel costs are causing headaches for the Biden administration, which has called on producers to pump more. On the other hand, oil companies are reluctant to explore after they pledged to adjust capital for shareholders. On the other hand, executives say they simply can’t even if they wanted to pump more. They face the same problems that occur across the economy, including labor shortages and high prices for parts and raw materials such as sand, which is key to crushing production.

Oil prices make up more than half the final cost of a gallon of gasoline, but they’re not the only factor. Taxes, distribution costs, and refining also affect prices.

Restricted refining capacity is starting to play a bigger role. Refining is the key step that turns crude oil into petroleum products that consumers and businesses use on a daily basis. The number of barrels of oil refineries that can be processed has declined since the pandemic, especially in the Northeast.

Meanwhile, exports of petroleum products from Russia were hit by the sanctions, which made Europe look for alternative suppliers. Refineries are operating at nearly full capacity, and diesel cracks — the difference between the cost of oil refineries and the price at which they sell their products — are spreading to record levels.

All of these factors are driving up gas prices. The national average gallon of gas hit a record high of $4,589 on Thursday, According to AAA, up from $3,043 at this time last year. Figures have not been adjusted for inflation.

Every state now averages over $4 a gallon for the first time ever The California median is now over $6.

diesel prices It also rockets up. Diesel retail prices hit an all-time high of $5,577 a gallon on Wednesday, up 76% from a year ago.

Finally, houses are bombing now $5,000 a year on gasolineAccording to Yardeni research, up from $2,800 a year ago, the company said.

How do fuel prices affect companies?

The widespread destruction of demand by rising gas prices may not yet have begun, but the effects of rising fuel costs are fading across the economy. Higher prices at the pump mean less money is spent in the consumer’s pocket. It also means increased costs for businesses, some or all of which will later be passed on to consumers.

Target is one company that is grappling with rising costs. Shares of the supermarket chain crashed 25% on Wednesday — the worst single day since 1987 — after the goal earnings resultsIt warned of inflationary pressures.

“We did not expect the rapid transformations that we have seen over the past 60 days. We did not expect transportation and freight costs to rise the way they have been with fuel prices rising to an all-time high,” said Target CEO Brian Cornell. Wednesday on the company’s quarterly earnings call.

He told CNBC that higher fuel and diesel costs would be an estimated additional cost of nearly $1 billion during the fiscal year and “a significant increase in that.” [Target] I did not expect “.

Made by the executives of Wal-Mart Similar Comments. “[F]Fuel costs accelerated during the quarter faster than we were able to get past them, creating a timing issue,” Walmart President and CEO Doug McMillon said Tuesday during the retailer’s first-quarter earnings call. Fuel is up more than $160 million more on the quarter in the US than we expected.” McMillon added that over the quarter, the company made “progress in matching prices with increased costs.”

Tractor Supply executives note that domestic freight costs and imports have increased “significantly” over the past year, and they expect these trends to continue throughout 2022.

The cost of shipping an offshore container has more than doubled compared to pre-pandemic rates, and the cost of fuel is almost one and a half times higher than it was a year ago.” Quarterly update.

Monster Beverage executives said the company saw “significant increases in cost of sales compared to the comparative first quarter of 2021 primarily due to increased freight and fuel costs.”

The airline industry is also feeling the impact as jet fuel prices are rising – especially on the East Coast.

Southwest Air indicated that it saw a “significant rise in the price of jet fuel in the market” during the last quarter, while United CEO Scott Kirby told CNBC that if jet fuel prices continued today, it would cost the airline $10 billion more than it did in the past. year 2019.

Bob Besterfield, CEO of CH Robinson, summed it up this way: “Our challenge, however, is really the high and record cost of diesel fuel which has a significant impact on overall freight rates,” he said. Wednesday on CNBC Close the bell.

To put the increase in context, he said the carrier will now have to pay nearly $1,000 more than last year in fuel costs to move a shipment from Los Angeles to the East Coast.

“This is real pressure on inflationary costs,” he said.

Is there any relief in sight?

Looking ahead, experts say the destruction of demand, or the level at which higher prices affect consumer behavior, could be the only thing stopping gasoline’s rise.

John Kilduff, partner at Again Capital, said: The national average is $5 In the cards for the busy driving season between Memorial Day weekend and July 4th.

“Appears [the national average] He said Wednesday on CNBC’s “Squawk on the Street.” “Last week we’ve seen gasoline demand rise to what is usually a summer kind of thing…there is more upside here.”

Kilduff pointed to two main factors driving demand despite the price hike: pent-up demand after the pandemic, and a strong labor market, which means people will pay what they have to get to get to their jobs.

On the other hand, Andy Lipow, president of Lipow Oil Associates, said he believes the national average will peak between $4.60 and $4.65.

He pointed out that the intense selling in stocks has stopped gasoline futures contracts lower, which may result in some temporary delay for consumers at the pump.

But petroleum is also used in a lot of consumer products, especially plastics, which means that even if gas prices go down temporarily, costs across the economy may still be high if oil stays high.

At this point, Rapidan McNally said it would take a recession to rein in product inflation. “It’s not a happy expectation. But [gas prices] We just have to go up, because there is still no indication of a real surrender to demand… They will go up until that happens,” he said.

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