We all hear people complaining about the fuel prices, and I’m sure we’ve all seen the “I did that” Biden stickers that people like to stick on the pumps at the gas stations. I am willing to bet that most people have no idea what drives the price of fuel. It is much more complex than pointing the finger at the President. There are many contributors to the cost of crude oil, and if one section of the pact falls short, we all suffer. The entire world takes part in the rise and fall of pricing, and there are endless situations that could arise and complicate matters even further. I hope to simplify the answer to the big question, “who controls the oil prices?”
Crude Oil Supply & Demand
The most significant player in the pricing game is supply and demand worldwide. That being said, when the economy is growing, so is the demand, which puts pressure on the supply. Crude oil is a traded commodity, meaning traders who buy and sell crude oil futures also play a big part in making your gas prices what you see at the pump. When the crude oil supply is threatened, this creates a heavy buying market that drives the futures pricing up. When traders sell their futures, it brings the pricing down, hence; supply and demand.
OPEC & Crude Oil
The United States is not part of OPEC, the Organization of Petroleum Exporting Countries, but that does not matter when it comes to what drives the price of oil. Despite OPEC’s efforts to manage production and maintain targeted price levels, member countries do not always comply with the production targets adopted by the organization. Oil prices can be affected by member countries’ unwillingness to maintain production targets. In addition, unexpected outages can reduce OPEC production. The amount of the disruption, how quickly it occurs, and the uncertainty of restoring the output has considerable influence on oil prices. Russia’s current state of affairs has driven supply down and the futures market up. It is not just the current crude oil supply driving the market; it is a prediction of what the pool will look like in the future. This is what the futures market is all about. It is tough to understand, but when spectators freak out over the potential future supply issues, they buy like crazy to lock in a good price before the per barrel cost rises.
COVID, Then Russia
In February 2022, Russia invaded Ukraine and drove prices to their highest levels since 2014. Russia is a major supplier of crude oil and supplies ten million barrels daily. “Opec+ tailors supply and demand to balance the market,” says Kate Dourian of the Energy Institute. “They keep prices high by lowering supplies when the demand for oil slumps.” Since Russia makes up a large amount of the OPEC’s oil, the OPEC has to respect them. Russia is currently happy with the prices and is sticking with its original plan of slowly increasing production through September.
Opec+ could also lower prices by putting more oil onto the market, which is what major importers like the US and UK want it to do. An additional one million barrels since June 2022 have been added to the global supply. They plan to add another 100,000 in September.
That said, OPEC still supplied two million barrels less than in spring 2020. In May 2020, OPEC cut ten million barrels a day, which was a huge mistake. They are slowly increasing the supply now but keeping pricing high with the speed at which they increase the supply. The countries that make up OPEC don’t all necessarily do what OPEC asks, so the price increase may have little to do with oil-producing countries not doing their part and increasing their output.
Saudi Arabia is not playing nicely despite being asked to increase production by American President Joe Biden and UK Prime Minister Boris Johnson. They have refused because they don’t want to be ordered around by the west.
The Bottom Line
The main factors impacting gasoline prices at the pump, according to the American Petroleum Institute (API), are the cost of global crude oil (61 percent), refining costs (14 percent), distribution and marketing costs (11 percent), and federal and state taxes (14 percent). OPEC doesn’t have direct influence over American oil. Still, since the global market and OPEC members set the oil price and supply about 40 percent of the world’s crude oil and export over 60 percent of total petroleum traded internationally, its policies indirectly affect U.S. companies’ prices. ExxonMobil and Chevron have boasted major profits because of this.
President Biden and the European Union decided to cut Russia out of their supply after the invasion of Ukraine. International oil prices rose on May 31 after the European Union agreed to cut Russian oil imports by 90 percent by the end of 2022. Kicking Russia off of our supply did little to affect prices in the United States because we depended on them very little for oil. However, the price is high because of what it has done to other countries and our futures market. Big Oil saw this as an opportunity to capitalize on profit.
You should start seeing some relief at the pumps soon if you have not already. As worldwide supply increases, the futures price per barrel will fall. Exxon had a $17.9 billion profit for this quarter. As you see, this is not a black-and-white matter, and the President doesn’t have much control over the price increase. Some argue that he declined to open the Keystone XL pipeline, and that’s what put us in this situation. As you can understand now, that is not the case. The U.S. is still a major crude oil supplier without it. With the supply increase and falling European pricing, we will eventually see Big Oil trend their pricing downwards. We all want to know how much we will still pay. That depends on everything I have mentioned above. As the saying goes, “It takes a village.”