Do Rising Gas Prices Mean a Cruel Summer for Investors?

Prices at the pump have been climbing this summer, driving endless speculation over the effects. Will they reignite inflation—and bring more rate hikes? Will higher gas costs squash consumers? How will the White House respond with an election year looming? But in our view, a lot of these fears take the move out of context—and demonstrate that sentiment remains plenty skeptical today.

US gas prices are up since the start of 2023, and that ascent picked up in July. The nationwide average has climbed 30 cents since the week of July 3—from $3.53 a gallon to $3.83 the week of August 7.^[i] Some regions have experienced a sharper increase than others—for example, East Coast retail gas prices are up 37 cents while Gulf Coast prices are up 35 cents over the same period.^[ii] West Coast prices haven’t jumped as high (up 15 cents), though the region’s average cost per gallon is the most expensive in the country at $4.69 a gallon. This is due primarily to unique local factors including California emissions standards that effectively ban fuel refined out of state, as well as Washington’s new carbon-trading system, which contributes to the state’s sporting the highest average gas prices in America.^[iii] Likewise, prices for diesel—used in commercial transport, trucking, farming, manufacturing and heating—have jumped 47 cents since July 3.^[iv]

Experts blame several factors for the summertime surge. A major one: Global crude oil prices are up, tied ostensibly to Saudi Arabia and Russia’s recent production cuts and expectations of strengthening oil demand (driven by optimism for US economic resilience). Some other, less-noted factors also contributed to higher gas prices. For example, hot summer weather, with temperatures over 100 degrees Fahrenheit in coastal Texas and Louisiana, has led to power outages and refinery outages—especially since those refiners’ equipment isn’t designed for temperatures above 95 degrees. Energy traders have contributed to an extent, too, as many have bought up gasoline futures contracts on the expectation the upcoming hurricane season may disrupt production (whether for hedging or other purposes).^[v] Moreover, some states’ gas taxes—many of which took effect on July 1—have contributed to higher payments at the pump, too. See Colorado’s “road usage fee” on gas (up from 2 cents to 3 cents a gallon) and diesel fuel (up from 4 cents to 6 cents a gallon).^[vi]

Yet gas prices remain far below year-ago levels, which were 30-year highs. (Exhibit 1) We caution investors against reading much into short-term price movements, up or down. Similar to stocks, commodities are subject to sentiment-driven swings that can flip on a dime.

Exhibit 1: Gas Prices Are Up—But Not Massively

Source: EIA, as of 8/9/2023. US Regular Gasoline Prices, weekly, 1/2/2023 – 8/7/2023.

Looking longer term, we don’t think gas prices are set to gallop higher—due largely to crude oil’s supply and demand drivers. To see why, go back to 2022, when global oil prices soared. Russia’s invasion of Ukraine sparked fears of global energy shortages, sending crude prices above $130 per barrel—and many analysts thought $200 per barrel was inevitable. Yet that didn’t happen. As we have written, markets adapted, and global oil prices returned to pre-2022 levels. Today, global supply seems ample relative to demand, despite OPEC+’s cuts, suggesting oil prices will stay range-bound. Non-OPEC+ producers are a big reason why—e.g., the EIA forecasts crude oil output in America, the world’s largest oil-producing nation, will pump a record 12.76 million barrels per day this year.^[vii]

In our view, the reaction to higher gas prices speaks to skeptical sentiment’s prevalence today. For example, some think resurgent gas prices will offset the broader disinflationary trend. But gasoline comprises just 3% of the CPI basket, so to meaningfully contribute to CPI, prices need to jump an awful lot, as they did in early 2022. An inflation surge would typically need rising prices in other forms of energy. We don’t see that happening given the aforementioned crude oil supply and demand factors. Others fret higher prices at the pump weighing on households—which will then knock spending, a major component of GDP. But gasoline spending is still spending, and though consumers may have to alter discretionary purchases, the amount spent isn’t changing. Furthermore, the prices we are talking about today aren’t exactly unprecedented. The shock factor is likely lower as a result.

As for how higher petrol prices will impact government officials’ decision making, some analysts suspect the White House will stop its purchases to replenish the Strategic Petroleum Reserve (SPR) following last year’s “emergency” release, removing one (in our view, overstated) price driver. Others speculate the Biden administration will try negotiating with Saudi Arabia to pump more oil. We won’t try to predict what politicians will do, but don’t overrate their ability to influence global oil supply. Pols worldwide have coordinated releases of their strategic oil reserves before, to much fanfare—but when put to scale, they are a drop in the bucket of the global oil market. Besides, if prices rise, that would likely be all the signal the private sector would need to raise output—another lesson 2022 reiterated.

Now, paying more to fill up the car before a summer road trip or for the daily work commute isn’t fun. But despite what many headlines say, higher gas prices aren’t the macroeconomic negative so many claim.