No doubt, everyone that drives for a living has noticed the increase in fuel price over the last six months. We saw the national average fuel price bottom out in the $2.40 range at the beginning of the pandemic and this lasted through October. That gave independent contractors the opportunity to run freight faster than usual without worrying too much about their biggest cost. However, we’ve recently seen national fuel price averages jump to $3.40, which is a 33% increase over a six month span!
So why is fuel going up? There isn’t a single answer, but like the price of any commodity it’s based on supply and demand.
Supply Issues
Low Oil Prices Cut Production
The modern day United States oil industry is built around a $50/barrel break even point. When oil falls below $50/barrel it becomes unprofitable for oil exploration as well oil production and shipping. During the COVID crisis of 2020, crude oil futures actually traded below $0 for a brief period of time. They averaged $39.68 for all of 2020. This below breakeven price forced bankruptcy on some oil producing companies. It also greatly reduced exploration and production of oil in America.
OPEC is Keeping Supplies Down
OPEC nations agreed to limit exports of crude oil to keep the supply lower and help raise prices. They will soon begin to increase output, but the supply is already low and they have made it clear their intention is to keep the price of oil at the current level or higher.
The U.S. Election
Since the election, the price of fuel has risen 80 cents. The oil markets clearly see the Biden and Harris administration as one that will work to inhibit US oil production. Being such a large producer, this will also impact global oil market supplies.
Refinery Maintenance for Summer Blends
Fuel prices almost always jump this time of year. That is due to scheduled shutdowns and annual maintenance in our refineries. They also use that time to switch everything to the summer blends of fuel that are required by the EPA. They generally shut down which lowers the supply of fuel. This of course makes it more expensive!
Demand Increases
Loosening COVID Restrictions
People are starting to move again! Commuters are returning to the office, air travel has picked up, and people are vacationing again. Vaccinations are also giving people confidence to get out again and are expected to help a summer travel boost. While we all want things to go back to normal, this sudden surge of fuel needed is not met with enough supply. This directly causes prices to go up.
A robust U.S. Economy
The whole country is using more fuel for everything from truck transportation, to home heating bills which is greatly increasing the demand for fuel.
Stimulus Checks
Stimulus checks have people out spending! Goldman Sachs has estimated that the recent stimulus could pump U.S. oil demand up by 200,000 barrels a day. If supplies don’t keep up, prices will continue to rise.
As you can see, there are many factors that are pushing the price of fuel up and up. But the simple economic reality is that demand is outpacing supply. We should probably expect prices to continue to rise for a while into the future.
OPEC Source - https://www.cnbc.com/2021/04/01/opec-to-decide-on-oil-production-policy-as-demand-concerns-persist.html
To read the previous article in the series, click here!