Gas prices hit $5 a gallon, but it doesn’t mean economic disaster.
Gasoline is the only product in modern-day America whose price is listed on giant signs almost everywhere you go. Most people, even if they don’t drive, probably have a pretty good sense of what gas costs — currently averaging $5 a gallon nationwide. The ubiquity and visibility of gas prices make them an easy shorthand for the rest of the economy, especially when they’re going up. And they often drive how people are generally feeling about the state of the economy and politics. But gas prices aren’t really the best metric for understanding the broader economy. They’re very good for understanding the state of oil and refining but reveal less than you might think about the real-world impact on people’s lives. There is a better, less alarmist measurement for understanding what’s happening to gas prices — one that shows that, even as gas prices near record highs, most households are still better off than they were in 2008. What actually determines the price of gas
Gas prices, which have increased almost 50 percent over the past six months, are not yet at a record inflation-adjusted high, though they may still get there. JPMorgan analyst Natasha Kaneva said there’s a very real risk it might reach $6 by August. To beat the actual 2008 record, adjusted in 2022 dollars, gas prices would have to rise past $5.33. The biggest driver of the cost of gas is the price of crude oil, which has been going up since October and is hovering around $120 a barrel, up from $70 a year ago. Russia’s war in Ukraine led the US and Europe to sanction Moscow, including its crude oil, which made up about 12 percent of the global market. (Before the war, the US got less than 4 percent of its oil from Russia, but those sanctions have affected oil markets globally by making it more expensive for others to access that oil.)
Demand for oil has also bounced back from the depths of the pandemic faster than oil production. A second major driver of rising prices is the costs of refining crude oil. These costs are also going up: Refineries have shut down in the past few years, outpacing the new refineries being built. And while capacity has increased per refinery, most US refineries are already working at nearly full capacity. In short, demand for more refined oil has approached pre-pandemic levels, but refinery capacity hasn’t kept up. The final two factors are how much it costs to get gas to your corner retail station and taxes. These are pretty marginal: Although some states have suspended their gas taxes, which pay for road improvement and highways, they make up a relatively small amount of the price. The federal Energy Information Administration illustrated how those costs break down, current as of April:
One thing you’ll notice missing: the president. President Joe Biden’s drilling policies have nothing to do with gas prices. This hasn’t stopped Republican politicians and conservative commentators from pointing to canceled leases in the Gulf of Mexico and Biden’s climate policies as a primary culprit for rising prices.
