Fuel Prices are a Problem for Business and Consumers

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The rise in fuel prices is unmistakable and at the forefront of customers’ minds, with billboards proclaiming that gas now costs $4, $5, or even more than $6 a gallon in certain areas.

With gas prices hitting all-time highs, Americans are already feeling the pinch at the pump. Higher fuel prices, however, are a drag on the economy as a whole, even if people have less money to spend. The rising cost of fuel, particularly diesel, has an impact on everything moved by truck, train, or ship.

As prices for all kinds of products and services rise, energy expenses are a big contribution to the decades-high inflation numbers that are popping up. “In a way, energy is the tail wagging the dog here,” said Bob McNally, president of Rapidan Energy Group, on CNBC’s “Power Lunch” on Wednesday.

“Diesel is the most cost-effective fuel.” It’s the economy’s lifeblood, transportation, and power in certain circumstances… so it’s deeply ingrained in economic activity and filtered through a wide range of commodities and services.”

What is the source of such high fuel prices?

Fuel prices are a problem for business and consumers

The rise in gasoline costs is largely due to the rise in oil prices. The Russian invasion of Ukraine is the newest cause for crude prices to rise, but prices were already rising before to the conflict.

Low pricing and institutional shareholders wanting larger returns pushed energy producers to cut back on investment and less profitable projects even before Covid.

Then, in the midst of the pandemic, when demand for petroleum goods plummeted, producers lowered output even further. Because no one was travelling anywhere and companies were closed, significantly less fuel was required. The decline in demand was so abrupt that West Texas Intermediate crude, the US oil standard, momentarily traded in the red.

Since then, economies have rebounded, manufacturing has resurrected, and people are once again driving and flying. Beginning last fall, this resulted in a jump in demand and a tightening of the oil market. President Joe Biden tapped the Strategic Petroleum Reserve in November as part of a coordinated effort with other countries, notably India and Japan, to bring down oil prices. However, the relief was fleeting. The invasion of Ukraine by Russia at the end of February shook an already shaky energy market.

On March 7, US oil hit its highest level since 2008, hitting $130 per barrel. Russia is the world’s greatest exporter of oil and products, and it provides natural gas to the European Union. While the United States, Canada, and others immediately prohibited Russian oil imports after the invasion, the European Union stated it couldn’t do so without causing harm.

Now, the EU is attempting to reach an agreement on the sixth round of sanctions on Russia, which includes oil, despite Hungary’s opposition. Oil has subsequently fallen from its post-invasion highs, but it is still trading far above $100. To put that figure in context, a barrel of petroleum sold for $75 at the start of 2022, whereas prices were closer to $63 at the same time last year.

The sharp rise in oil prices, and thus fuel prices, is presenting problems for the Biden administration, which has urged producers to pump more. After promising capital discipline to shareholders, oil companies are hesitant to drill, and executives claim that even if they wanted to pump more, they simply can’t. They’re dealing with the same concerns that are affecting the rest of the economy, such as labour shortages and growing pricing for parts and raw supplies like sand, which is essential for fracking.

Oil prices account for more than half of the total cost of a gallon of gas, but they aren’t the only determinant. Prices are also influenced by taxes, distribution, and refining costs. Refining capacity constraints are starting to play a bigger impact. Refining is the process of converting crude oil into petroleum products that people and businesses use on a daily basis. Since the pandemic, the amount of oil that refineries can process has decreased, particularly in the Northeast.

Meanwhile, sanctions are preventing Russia from exporting petroleum products, forcing Europe to seek alternative sources. Refineries are nearly full, and crack spreads for diesel — the difference between refiners’ cost of oil and the price at which they sell their products — have reached new highs.

All of these variables are conspiring to raise gas costs. According to AAA, the national average cost a gallon of gas set a new high of $4.589 on Thursday, up from $3.043 at this time last year. The figures haven’t been adjusted for inflation. 7For the first time in history, every state is now averaging more than $4 per gallon, with California’s statewide average currently over $6.

Diesel prices are also skyrocketing. On Wednesday, retail diesel prices reached an all-time high of $5.577 per gallon, a 76 percent increase over the previous year. According to Yardeni Research, households now spend $5,000 per year on gasoline, up from $2,800 a year earlier.

What impact do rising fuel prices have on businesses?

Fuel prices are a problem for business and consumers

Although demand destruction, or the degree to which high prices influence consumer behavior, has not yet occurred on a large scale as a result of rising fuel prices, the effects are spreading across the economy. Higher gas prices mean less money in customers’ pockets and increased costs for businesses, some or all of which will be passed on to consumers later.

Target is one of the businesses that is dealing with rising costs. Target’s stock plummeted 25% on Wednesday, its worst day since 1987, following the retailer’s earnings report, which included a warning about inflationary pressures.

“We weren’t expecting the quick changes we’ve seen in the previous 60 days.” “As fuel prices have gone to all-time highs, we did not expect transportation and freight costs to skyrocket as they have,” Target CEO Brian Cornell said during the company’s quarterly earnings call on Wednesday.

Increasing fuel and diesel costs would cost Target an additional $1 billion this fiscal year, a “substantial rise that [Target] didn’t anticipate.”

Walmart executives made similar remarks. “[F]uel expenses escalated during the quarter faster than we were able to pass them through, creating a timing issue,” Walmart President and CEO Doug McMillon said during the company’s first-quarter earnings call on Tuesday. “In the United States, fuel was approximately $160 million higher than we projected for the quarter.” McMillon went on to say that the company made “progress matching pricing to the rising costs” throughout the quarter.

Domestic and import freight prices have risen “significantly” in the last year, according to Tractor Supply executives, who expect this trend to continue through 2022.

′′The cost of shipping an international container has more than doubled compared to pre-pandemic rates, and the cost of gasoline is around one-and-a-half times more than it was merely a year ago,” Amazon said in its quarterly report.

“Significant increases in cost of sales relative to the comparative 2021 first quarter,” according to Monster Beverage management, “mainly owing to increasing freight rates and fuel expenditures.” The airline industry is also feeling the effects, with higher jet fuel prices, particularly on the East Coast.

Southwest Airlines reported a “substantial increase in market jet fuel prices” in the third quarter, while United Airlines CEO Scott Kirby told CNBC that if current jet fuel prices persist, the company will spend $10 billion more in 2019.

C.H. Robinson’s CEO, Bob Biesterfeld, summed it perfectly. “However, the difficulty that we face is actually the rising and record cost of diesel fuel, which has such a tremendous impact on overall freight price,” he said on CNBC’s “Closing Bell” on Wednesday.

To put the increase in perspective, he said a carrier will have to pay over $1,000 more in gasoline expenditures this year than last year to convey a package from Los Angeles to the East Coast. “That’s putting a lot of pressure on inflationary costs,” he explained.

Is there any hope for you?

Fuel prices are a problem for business and consumers

Experts believe that, in the future, demand destruction may be the only way to keep gasoline prices from rising. According to John Kilduff, a partner at Again Capital, the busiest travel season between Memorial Day weekend and the Fourth of July will see a $5 national average.

He added on CNBC’s “Squawk on the Street” on Wednesday that “it appears [the national average] needs to go higher.” “We saw gasoline demand spike to summertime levels last week… there’s still room for additional upside here.”

Kilduff attributed high demand to two important factors: pent-up demand following the pandemic and a healthy labour market, which implies people will spend whatever it takes to get to work. According to Kilduff of Again Capital, the bull market in oil will be fueled by stable gas demand.

The national average, according to Andy Lipow, president of Lipow Oil Associates, will peak between $4.60 and $4.65. He pointed out that stock market declines had driven down gasoline futures, giving customers a little reprieve at the pump.

However, because petroleum is used in so many consumer products, particularly plastic, even if gas prices fall briefly, expenses across the economy may remain high if oil prices remain high.

According to McNally of Rapidan, reining down product inflation now will require a recession. “It’s not looking good. But [gas prices] just have to rise since there is no sign of true demand surrender yet… they will continue to rise until that occurs,” he said.

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