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On Tuesday, April 18, 2023, fuel price tracking company GasBuddy reported that the average price of gasoline in the United States reached its highest price this year. The company stated that the average price of gasoline in the United States is now $3.65 per gallon, which represents a $0.076 increase over the past week. This price is also $0.221 per gallon higher than a month ago. So, if you suspect that it is more expensive to fuel your car than it was a few weeks ago, you are not dreaming.

GasBuddy’s head of petroleum analysis described the situation as such:

With oil prices touching their highest level of 2023 at nearly $83 per barrel, the national average price of of gasoline has continued to inch higher, with 45 of the nation’s fifty states seeing prices rise over the last week. While the rising price of oil is likely the largest factor in rising gas prices, seasonal impacts continue to also exert pressure on prices.

With the Northeast making the final step in the transition to summer gasoline this week, states in that region should expect a sharp rise in gasoline prices over the next week or two. Every other region has already seen the final step in the transition occur, so while other areas will see prices continue to slowly rise, the Northeast is likely to see a pretty hefty jump of 15-40 cents per gallon soon. Oil prices remain a wildcard, but we’re likely a few weeks away from seeing the national average peak. Whether it hits $4 per gallon or not is still perhaps a 50/50 chance.

GasBuddy

I will admit that I am not nearly as optimistic as GasBuddy when it comes to a near-term annual peak in gasoline prices. That seems unlikely unless the United States plunges into a recession during the second half of the year, which is admittedly a possibility. However, even that might not cause gasoline prices to peak.

Reasons For Gas Price Increase

As GasBuddy correctly points out, crude oil prices have once again started to rise, following some price weakness in the first three months of this year:

Source: Business Insider

As we can see, the price of West Texas Intermediate crude oil is up 3.1% year-to-date despite the fact that it is down 2.05% in morning trading (this chart is as of 10:38 a.m. EST). We can see a very steep increase from the middle of March, where fears of a near-term recession pushed down crude oil futures prices. That is logical, as recessions typically result in lesser demand for gasoline and diesel fuel. Based on current action in the stock market, these recessionary fears have subsided. Admittedly though, most of the actual economic data is still pointing towards a recession setting in during the second half of this year. I have shown some of this data in this blog and the rest can easily be obtained from various other sources.

If indeed a recession does set in, this could apply some downward pressure on oil prices and thus cause gasoline prices to hit their annual peak sometime in the next few weeks. This is in line with the comments made by GasBuddy above.

However, in the absence of a recession, it seems likely that crude oil and gasoline prices will continue to rise over the remainder of the year.

OPEC Production Cuts

On April 3, 2023, the Organization of Petroleum Exporting Countries announced that it would cut production by one million barrels in May. This comes on the heels of a two million barrel per day cut announced in October of 2022. Oil prices surged following this announcement, with Brent crude oil climbing 5.3% in the first trading day following OPEC’s announcement. According to Reuters, once these cuts are imposed in May, the organization will have reduced global oil supply by 3.66 million barrels per day from the levels that we had last summer.

These cuts come as we are entering into the summer season in the northern hemisphere, which typically results in rising consumption of gasoline and other petroleum distillates. After all, the summer months are when Europeans and Americans both typically embark on pleasure travel for vacations. The added demand from this typically boosts the consumption of fuel used for this purpose. We are certainly starting to see this in the United States, as gasoline consumption was up 1.4% last week compared to the prior week and we have not yet entered the summer travel season.

Laws Of Economics

Thus, it appears that we are looking at a situation in which gasoline consumption is poised to rise but the global production of crude oil is down sharply. The basic economic law of supply and demand states that this should cause energy prices to rise. This is, in fact, the reason why crude oil prices surged following OPEC’s announcement. Naturally, as crude oil prices rise, so do gasoline prices.

Thus, it appears that barring a recession, gasoline prices are likely to rise over the coming months. This could result in a significant setback in the progress that the Federal Reserve has seemingly made in its fight against inflation. That could even make the market’s prediction of a near-term pause or pivot in the current monetary tightening policy look very optimistic. Thus, we could actually see a repeat of 2022 in which everything outside of the energy sector declines in price. It would be a good idea to consider this possibility when making your investment decisions.

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