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Fuel prices are a problem for business and consumers — Why costs are so high

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An advertisement displaying gas prices in a San Mateo County gas station, California on May 10, 2022

China News Service – Getty Images| China News Service | Getty Images

It is hard to ignore the rise in gasoline prices. Billboards proclaim that gas costs now $4 or $5 per gallon, and in certain areas even $6.

Americans immediately feel the effect of rising fuel costs, which are at an all-time high. Higher fuel prices can be a problem for all sectors of the economy, not just for consumers who have less money to spend. Everything that is transported by truck, train, or ship will be affected by the rising fuel cost, particularly diesel. 

Inflation numbers that are decades high have been attributed to energy costs, which drives up the prices of all goods and services.

According to Bob McNally of Rapidan Energy Group president, “Energy is in a certain way the tail waggling the dog here”. “Power Lunch.” 

The economic fuel is diesel. It is the fuel of economic activity, transport, and power.

Why is fuel price so high?

The jump in oil prices was a major factor in the rise in gasoline prices. The latest factor driving crude prices higher is Russia’s invasion in Ukraine. However, oil prices had been moving ahead of this war.

Energy producers have been cutting back investment in less profitable projects since before the introduction of Covid. This was despite pressure from institutional shareholders and low prices.

The pandemic triggered a further reduction in production by producers. Because people weren’t moving, businesses closed down and less fuel was required. The demand dropped suddenly. West Texas Intermediate crudeShortly traded in was, which is the U.S. crude oil benchmark. negative territory

Since then, economies have reopened and manufacturing has recovered. People are now driving again and flying again. The result was a rise in oil demand, and an ever tighter market for crude oil. The Strategic Petroleum Reserve was tapped by President Joe Biden in November. coordinated effortIn an attempt to reduce prices, we partnered with India and Japan. However, the relief was temporary.

Russia invaded Ukraine on February 28th, sending an already fragile market for energy reeling.

The U.S.’s oil price reached $130 per barrel on March 7th, the highest since 2008. Russia is the top oil and product exporter worldwide, while the European Union relies upon it for natural gas. The European Union stated that it could not ban Russian oil imports from the United States, Canada, and other countries shortly after the invasion.

The bloc now wants to reach a sixth round against Russia, which includes oil. However, Hungary is one of those that is resisting. 

Although oil prices have fallen from their post-invasion peak, they remain above $100. This is because a barrel of crude oil cost $75 at the start of 2022, while it was closer to $63 at the same time last year.

Biden’s administration has been urging producers to increase their oil production in response to the rapid rise of fuel prices and thus, is facing a problem. The executives of oil companies say they are hesitant to drill after they have pledged capital discipline to shareholders. The same problems are facing them as the rest of the economy. These include labor shortages, rising costs for raw parts, and sand which is crucial to fracking production.

Although oil prices account for more than half the final cost of a gallon gasoline, it is not the only factor. Prices are also affected by taxes, distribution costs and refining expenses. 

Limited refining capabilities are playing a greater role. The key stage that transforms crude oil into petroleum products is refining. Since the pandemic in particular, the amount of oil refiners are able to process has dropped.

While sanctions are being imposed on Russia’s petroleum products exports, Europe is looking to find alternative suppliers. Refiners are running nearly at full capacity, and crack spreads — the difference between refiners’ cost of oil and the price at which they sell their products — for diesel are now at record levels. 

These factors are driving gas prices up. On Thursday, the national average price per gallon for gas was $4.589. according to AAAThis was an increase from the $3.043 reported last year. Inflation is not included in the numbers.

Each state now averages more than $4 a gallon, which is the highest recorded figure. California’s statewide average is now above $6.

Diesel pricesPrices are increasing at an alarming rate. On Wednesday, retail diesel prices reached an all-time record high at $5.577 per gallon. This is 76% more than the previous year.

Now, households are spending more $5,000 per year on gasolineYardeni Research claims that the price of a home has risen from $2,800 last year to $2,500 today.

Which companies are affected by fuel price fluctuations?

While the effect of surging fuel prices on demand destruction or consumer behavior is not yet evident, it has a significant impact on the entire economy. Higher fuel prices not only mean less money for consumers, but they also increase costs for businesses. Some or all of these will be passed on to consumers.

Target is among the many companies struggling with rising costs. Shares of the store chain cratered 25% on Wednesday — the single worst day since 1987 — following Target’s earnings resultsDuring which time it warned about rising inflationary pressures.

We didn’t anticipate the drastic shifts that we have seen in the past 60 days. Target CEO Brian Cornell stated Wednesday that he didn’t anticipate freight and transportation costs rising the way they did as fuel prices rose to unprecedented levels.

CNBC was informed by him that rising fuel and diesel prices will result in an additional cost of $1 billion per year, and that it would be “significantly higher that that.” [Target] didn’t anticipate.”

Walmart executives made similar comments. “[F]Walmart CEO Doug McMillon stated Tuesday that uel prices rose faster than expected during the quarter, making it difficult to manage them. The quarter’s fuel costs were $160 million more than what we expected in the U.S. McMillon said that the company had made progress matching prices to higher costs over the quarter.

Tractor Supply’s executives stated that import and domestic freight prices have been increasing “substantially” in the last year. These trends are expected to continue throughout 2022.

Amazon stated that shipping an overseas container to a country has been more expensive than ever, and fuel costs are approximately one-and-a half times as high than they were even one year ago.” quarterly update

Monster Beverage executive said that the company saw “significantly higher sales costs than the comparable 2021 quarter” primarily because of increased fuel and freight prices.

The airline industry is also feeling the impact, as jet fuel prices — especially on the East Coast — surge. 

Southwest Airlines pointed out that they saw an “important rise in market fuel prices” in the third quarter. United Airlines CEO Scott Kirby stated that, if jet fuel prices remain the same today, it would cost them $10 billion more in 2019 than it did in 2019.

Bob Biesterfeld, CEO at C.H. Robinson summarized the situation. He said that the challenge facing us is actually rising prices for diesel fuel. This has such an impact on freight pricing.” Robinson spoke Wednesday to CNBC. “Closing Bell.”

He said that the cost of fuel to transport a shipment between Los Angeles and the East Coast will increase by nearly $1,000 this year.

He said, “That’s an actual pressure on inflationary cost.”

Do you see any relief?

Experts believe that the best way to stop rising prices of gasoline is to reduce demand.

John Kilduff of Again Capital said that a $5 national averageIt is expected that traffic will be heavy between Memorial Day Weekend and Fourth of July. 

It appears [the national average]He stated Wednesday on CNBC’s Squawk on the Street that gasoline demand needs to rise. “Last Week we saw gasoline demand increase to levels that are typically associated with summertime… there is more upside.”

Kilduff identified two main factors driving high demand despite high price: pent up demand after the pandemic; and strong labor markets, which ensure that workers will not be discouraged from paying what is necessary to do their jobs.

Andy Lipow, President of Lipow Oil Associates stated that the average national price will be between $4.60- $4.65.

He pointed out that stocks have been selling off steadily. gasoline futuresThis could provide some temporary relief for pump users.

Petroleum is used in many consumer goods, including plastic. This means that even though gas prices may temporarily drop, the economic costs could still be high if the price of oil remains high.

Rapidan’s McNally claimed that at this stage it would require a recession to reduce product inflation. This is not a positive forecast. It is, however. [gas prices]He said that they must go higher as there are no signs yet of demand capitulation. They will keep going up until this happens.”

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