Although there are many indicators of how the global economy is going, the price of gasoline is the one that we all know best. The average cost of a gallon of gasoline in the U.S. is now above $4.25 per gallon, nominally higher than they have ever been. U.S. policymakers have for decades been saying that we need to get off of foreign energy supplies, it wasn’t wrong then and its certainly not wrong now. But today we have options that we haven’t had in the past.
For the first time in 70 years, we are able to produce as much crude oil and petroleum products as we consume, but a lack of pipelines and the right type of refining capabilities hinders our ability to be fully self-sufficient. We also now have the ability to stop using much of the petroleum altogether by electrifying transportation.
Given how much uncertainty is in the global oil market, prices could very well go higher unless more crude is able to make it to market or demand goes down. At the core, the price of gasoline is going up because the price of crude oil is going up. The price of crude oil is up for a multitude of reasons, not all of them related to Russia’s current invasion of Ukraine. The price of oil has slowly been increasing over the past year also because the recovery from COVID-19 has outpaced expectations, years of low-cost oil has led to lower levels of investment in exploration, and the same inflation and workforce issues that the rest of the economy is facing.
However, Russia’s invasion of Ukraine has accelerated the rise. In 2021, Russia was the world’s third largest oil producer behind the US and Saudi Arabia. Very recently, Russia produced about 10.5 million barrels of crude oil and products per day, or about 10% of global production.
Imports of Russian crude oil accounted for about 0.2 million barrels per day in the U.S., or about 1% of total daily processing. We also imported about 0.5 million barrels per day of petroleum products from Russia, mostly in the form of unfinished heavy oils, but some finished gasoline and diesel fuels too.
Thus, an embargo on Russian energy exports is more symbolic in that it won’t go that far in punishing Russia itself. But, if it encourages other countries to follow suit, it could have a much bigger impact. However, limits on how Russia can transact in the global financial system already appear to be hurting their ability to sell crude as evidenced by Russia offering steep discounts on crude oil exports, up to 25%, to places like India.
Calls to increase domestic production of oil and gas can help, but it will take time to bring that oil to market. Adding to the complexity, our refineries, particularly those along the Gulf Coast, are generally set up to handle heavy, sour crudes that come from places like the Middle East and Venezuela and are less able to handle the light, sweet crudes produced in places like West Texas. If we want to utilize more domestic crude, we might also have to retool our refineries, which will also take time and cost money.
In the short term, we can lower demand by conserving oil by continuing to work from home and not burn gasoline for commuting and non-essential trips. In the longer term, we can and must get off of foreign oil by electrifying transportation. If Russian crude fully disappears from the global oil markets, prices are likely to go higher than they currently are. High energy prices can trigger economic recessions, which might serve to reduce demand. While no single country can make up for a loss of all of Russia’s oil exports, some degree could be replaced by Venezuela, Iran, or perhaps some other Middle Eastern countries if we can hammer out agreements with them. However, there are other geopolitical issues, such as nuclear arms proliferation, that make those deals hard.
Although not without its faults, electricity in the U.S. is already almost 100% domestically produced. If we want energy independence, we already have a pathway there.
