When voters head to the polls in just two weeks, they may have the year’s roller coaster ride of gas prices on their minds.
After the coronavirus pandemic sent gas prices plummeting in early 2020, prices saw a slow but steady rise for almost two years as the economy recovered, which increased demand through travel and commuting. By the start of 2022, winter prices were already nearing historical highs, not adjusting for inflation.
Then, in February, Russia — a major oil producer — invaded Ukraine, putting pressure on the West to take their business elsewhere. This put a crimp in global oil supplies, sending prices higher. In the United States, gas prices rose to an average of $5.03 per gallon by June, a record for any month in history.
Since then, though, prices have fallen. By September, the monthly average was $3.82, a decline of $1.21 in just three months. Then, by late October, the price had ticked up to $3.99 a gallon, though there are tentative signs suggesting further declines in the near future.
What’s going on? We sought data and expert commentary to explain.
How high are gasoline prices?
Using the most basic measurement, U.S. gas prices hit historical highs earlier this year.
Over the first nine months of 2022, gasoline averaged $4.19 a gallon. If that holds through the final three months of the year, it will set a new record for annual average gas prices, topping the $3.68 seen in 2012, without adjusting for inflation.
At specific points in 2022, gasoline prices were significantly higher than the yearly average. At their peak in June, gas prices hit $5.03 a gallon, marking the first time they had ever averaged more than $5 for a month. (The figures cited in this article are all national averages; there is variation across regions and from gas station to gas station. Other sources of variation in a household’s gasoline costs depend on how the number of cars, how much they’re driven and their fuel efficiency.)
Factoring inflation into gas prices is trickier than it looks. Simply applying the standard overall inflation measures to adjust gas prices is problematic because gas prices are already part of these standard inflation measures, meaning gas prices would appear in both the numerator and denominator.
Instead, we created a metric analyzing how much a typical gasoline purchase costs as a percentage of income — basically, a measure of the burden of higher gas prices for the typical household.
First, we calculated the average cost of 10 gallons of gas, which is close to the average weekly purchase, according to GasBuddy.com. Then we used data capturing per capita personal disposable income from the federal Bureau of Economic Analysis. This figure reflects not just salaries and wages but also government payments, then adjusts that amount for taxes paid.
We divided this personal disposable income figure by 52 to approximate weekly income. Then we divided the cost of 10 gallons of gas by the weekly income figure to determine what percentage of weekly income was devoted to paying for a typical amount of gasoline on a weekly basis.
At its peak in June 2022, a typical gas purchase accounted for 4.6% of weekly income. That was a little lower than the annual averages for 2008, 2011, 2012 and 2013, and barring a huge increase in the last quarter of the year, the annual average for 2022 should be quite a bit lower than those years. If that’s a surprise, it’s because people don’t usually think about how their earnings have increased over time—only about how prices are going up.
Since the June peak, gas prices have fallen closer to the long-term average for this metric.
What causes gas prices to spike and fall?
The initial factor pushing down gas prices was the pandemic and the recovery. The coronavirus put the brakes on a huge slice of the economy, which dramatically drove down the demand for fossil fuels. People stopped driving. The demand for electricity fell, reducing the demand for the natural gas that fuels power plants.
When the economy began to recover, demand for gasoline rose again. Delays in restoring drilling capacity and higher transportation costs led to higher prices. And because gas prices tend to rise rapidly with changes in the cost of crude oil, American drivers see the difference at the pump quickly.
Matters worsened with Russia’s attack on Ukraine. Russian crude oil represents about 4% of America’s oil supply. But the bigger impact has been on Europe, which is more reliant on Russian energy. And in a global market, those price pressures have reverberated in the U.S.
Other factors have played a role at certain times, such as ill-timed refinery outages. These seem to have eased, said Hugh Daigle, associate professor at the University of Texas’ Hildebrand Department of Petroleum and Geosystems Engineering.
Meanwhile, a decrease in miles driven amid the higher prices — down 1.6% year over year in June and 3.3% in July — has helped bring prices down.
However, the primary factor driving the price of gas at the pump is the price of crude oil in the global marketplace. Unfortunately for U.S. drivers, the crude oil price is effectively set in the global market, where the U.S. has limited influence. Russia and OPEC, the group of petroleum-exporting countries, play a stronger role in setting prices globally; together, they account for a bit over half of global production.
“Fossil fuel prices are dictated by international markets,” Gary Yohe, emeritus professor of economics and environmental studies at Wesleyan University, told PolitiFact earlier this year. “Fiddling with our supplies a little will not help lower prices here or abroad.”
President Joe Biden has tapped the Strategic Petroleum Reserve, and while that may have helped lower prices on the margins, the amount of new supply from the reserve is a drop in the worldwide bucket.
Biden’s entreaties this summer to Saudi Arabia to boost production failed. OPEC decided to do the opposite, which may be a reason why the price drops that started in July have stalled in recent weeks.
The U.S. can increase its own production, of course. But that strategy has practical limits.
For starters, the pandemic affected supplies of the necessary drilling hardware, and companies have had problems finding enough workers. The Biden administration’s moves to expand renewable energy sources on a long-term basis made some companies less eager to invest in new facilities in the short term. And some energy firms focused more on returning dividends to investors than on boosting supplies.
In reality, U.S. oil production is already fairly high. It’s on pace to rise in 2022, at least modestly, and will likely hit an annual level that has only been exceeded once, in 2019. The Energy Department’s official projection for 2023 shows domestic oil production hitting a new record. And under Biden, the number of federal drilling permits granted hit a new high.
Simply boosting U.S. oil production isn’t going to solve all problems, experts warn.
Oil companies already have a backlog of more than 9,000 approved permits that they are not using. Because acting on a permit requires capital investments, companies want to feel confident that their up-front outlays will be paid back with sufficient revenues. In a sector with prices as volatile as energy, this sometimes leads them to adopt a wait-and-see attitude rather than jumping right into production.
For all the clamor for more U.S. supply, oil rig counts have not quite caught up to the number in use prior to the pandemic. They are also far below the highs of 2014.
This is not because the Biden administration is opposed to more drilling, experts say.
“The market is telling us that there’s not much profit to be made in increasing production dramatically,” Daigle said. “Since the oil bust around 2015, there has been a remarkable amount of capital discipline being exhibited by producers — their investors want better return on investment. This is also probably a function of forecasts for softening demand.”
If prices at the pump do decline in the coming months, it could be for a not-so-desired reason: Prices tend to fall during a recession, when economic activity sags and demand falls.
