3 Reasons Why Gasoline Prices Are So High — And When They Might Fall

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Gas prices are breaking records almost daily, causing financial problems for millions of Americans. But it also raises questions about why fuel is so expensive and who is to blame. Consumers are also wondering when they might see some relief.

Not surprisingly, skyrocketing gas prices are having a very serious impact on household budgets: According to one Wall Street estimate, the typical household could incur an extra $2,000 this year simply because of the higher costs. Gas prices hit a new high again on Thursday, averaging $4.31 per gallon, according to AAA data. Until this week, the previous record was $4.10 per gallon in 2008, just before the financial crisis.

All of a sudden, fuel prices have become a major topic of discussion as families budget higher gas costs and cut spending in other areas. Some Americans are already driving less due to higher prices. According to Morning Consult, one in three adults say they have been driving less in the past month.

So how did we get here? Today’s stratospheric gas prices are rooted in the COVID-19 pandemic as Russia’s war with Ukraine has driven prices up in recent weeks, said Patrick De Haan, head of oil analysis at GasBuddy.

“The overall aspect is that supply and demand have changed,” he told CBS MoneyWatch. “Covid turned everything upside down. If it hadn’t happened, we would have been in a different situation.”

Here are three reasons why gas prices are rising and when experts say they might come down.

Post-pandemic gas demand

When the pandemic first hit the US in March 2020, gasoline demand plummeted as Americans took shelter at home due to nationwide restrictions. According to the AAA, the typical driver cut their driving time in half.

This sharp decline in demand caused gas prices to fall to an average of $1.94 per gallon in April 2020.

But as the economy recovered — as vaccines began to appear that made Americans feel safer to travel and shop — people resumed driving. As demand increased, gas prices also began to creep up. By March 2021, the average price per gallon of gasoline was $2.82, up 45% since the pandemic.

Reducing oil production

When demand for gas and oil plummeted during the pandemic, OPEC and oil-producing nations such as Russia cut production by an unprecedented 10 million barrels. For comparison, this is 10% of the world supply.

But as the global economy recovered from the pandemic, OPEC has been slowly increasing output, De Haan said. “We are approaching pre-COVID consumption levels, but production is still lagging behind. OPEC did not start increasing production until July 2021. It was already too late – they were way behind.”

Meanwhile, U.S. manufacturers have said they are ramping up production but warned it could be some time before supplies reach the market and affect gas station prices, Politico reported.

US sanctions against Russia affect the global market

Against this backdrop of steadily rising prices, Russia’s war in Ukraine caused a sharp jump in gas prices. President Biden on Tuesday announced a US ban on Russian oil and gas imports, targeting Russia’s main source of income amid the conflict.

The US imports less than 10% of its oil and gas from Russia. So why are US prices rising so much if the country is not dependent on fuel from Russia? According to De Haan, the increase in gas prices is associated with the expansion of the global oil market.

MoneyWatch: rising gas prices are putting pressure on US households 04:19

“When the US imposes sanctions, it greatly affects Russia’s ability to export oil,” he said. “We don’t import much, but someone else imports, and we make it difficult for Russian oil to enter the world market, and prices react to that.”

Tipping point for gas consumers

It is possible that the average price per gallon could reach $5. Some regions already have it, such as California, where drivers pay $5.69 a gallon.

But where the gas price goes depends on a number of factors, such as whether the US makes a deal with Venezuela to import fuel from that country, De Haan said.

It’s also important to remember that, adjusted for inflation, today’s fuel prices are still below their 2008 peak, he said. In today’s dollars, the price was closer to $5.25 a gallon. De Haan believes that most consumers will not drive less until prices hit $5 a gallon.

“We are not close to that,” De Haan said. “5 dollars [per gallon] it’s the old $4, and there could be a tipping point somewhere north of $5” that forces drivers to cut costs.

So when will gas prices fall?

Expect gas prices to remain high for weeks, if not months, experts say. Headline inflation is likely to worsen in March and April and then improve, Comerica Bank chief economist Bill Adams said in the report.

“Inflation will accelerate in March and April as the indirect effects of the Russo-Ukrainian war will further push up prices at supermarkets, at gas stations and on utility bills,” Adams said.

But inflation could start to ease later this year, falling to 5.5% by September, predicts Ian Shepherdson, chief economist at Pantheon Macroeconomics.

According to De Haan, it is not yet clear when gas prices may decrease, as this is closely linked to Russia’s war against Ukraine.

“It’s hard to say – it could be weeks or months,” he said. “If Putin remains president and signs a peace treaty, it will take months for countries to do business with him again, because they have to evaluate whether he is reliable. If there is a change of regime in Russia, a change [in gas prices] could come much faster.”

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