UPDATE: Will California gasoline prices ever go down? Here’s what needs to happen
California gasoline prices are likely to go down – eventually, those monitoring the escalation say.
“You can argue that prices at the pump now are artificially driven,” said Sanjay Varshney, professor of finance at California State University, Sacramento.
Prices, in fact, inched down very slightly Wednesday nationally by about 1 cent per gallon compared to Tuesday. California’s average price for regular gasoline was up another 2 cents per gallon Wednesday to $5.77.
Oil prices soared as Russia invaded Ukraine. But crude oil prices have fallen significantly in recent days since flirting with $140 a barrel. Prices dropped below $100 a barrel this week, as other nations indicated they would ramp up production.
Experts still see volatility, and lawmakers in Sacramento and Washington are frantically scrambling to find ways to stabilize and lower gasoline prices that have been setting new records almost daily.
The fixes sound simple — suspend fuel taxes, produce more domestic oil, release oil from the U.S. Strategic Petroleum Reserve — but they really are not.
“None of this can be controlled like a light switch,” Varshney said.
The reasons oil prices go up and down are complex and largely beyond the control of any single nation.
“It’s a world oil market,” said Severin Borenstein, faculty director of the Energy Institute at the Haas Business School at the University of California Berkeley.
Nor is there a lot a leader can do. “The price is dictated by the world’s 8 billion people and their consumption, not one president,” said Patrick De Haan, head of petroleum analysis at Gas Buddy, which monitors gasoline prices.
Why are gas prices so high?
What’s largely created the sudden spike in prices is uncertainty as Russia continues its invasion of Ukraine.
While the U.S. ban on Russian oil is likely to have little effect on supplies in this country — about 8% of U.S. oil and petroleum imports last year came from Russia — boycotting Russian oil has a larger effect on supplies used by other countries, helping to drive up prices worldwide.
The good news is that in recent years, prices have gone up and then down dramatically in California. In March 2011, the average price of a gallon of regular gasoline was $4.35. It sank to $3.60 10 months later and by February, 2015, was $2.44.
Then and now, the market was largely reacting to the most basic reason prices are volatile and were up even before the Russian invasion. Over the last two years, demand plunged in the early stages of the COVID-19 pandemic and then surged.
“The short run problem is that demand came back quickly, and supply hasn’t caught up,” Borenstein said.
When will gas prices fall?
Getting supply and demand back in balance is a key reason experts see oil prices dropping later this year.
“We expect as the year progresses, supply will meet demand, reversing the situation that led to rising gas prices this year, leading to relief at the pump,” said Gas Buddy’s 2022 outlook. “The relief could accelerate in mid to late 2022 as the imbalance is rectified and potentially supply even outpaces demand.”
Prices could drop for other reasons, the analysts say. Among them:
▪ More supply. The White House is pressing oil-producing countries to send more product to the United States, and is encouraging more domestic production.
The White House said it “in conversations with a range of energy producers and consumers on further steps we can take to ensure a stable global supply of energy.”
That alone should mean lower prices because “prices of oil fall with more production,” said Mark Schniepp, director of the California Economic Forecast.
▪ Lower taxes. Efforts are underway to suspend, or at least freeze, fuel taxes. In California Gov. Gavin Newsom has proposed not imposing the cost of living adjustment scheduled for the state’s gasoline tax this summer.
In Washington, some Democrats are pushing to suspend the 18.4 cents a gallon federal gasoline tax, and the White house has not ruled that out.
Rep. Lou Correa, D-Anaheim, contends that a lower tax would ripple through the economy, lowering not only the price of gasoline but the cost of groceries and other vital items.
▪ The Strategic Petroleum Reserve. Created after prices spiked and supplies dwindled during the 1973-74 Arab oil embargo, the reserve stores oil underground salt caverns in Texas and Louisiana.
President Joe Biden has ordered oil to be drawn from the reserve, but it can only provide up to 4 million barrels a day. While that helps supplies during emergencies — in 2020, the U.S. consumed about 19 million barrels a day — its effects on prices have been minimal.
The release is “not nothing and it could move prices a bit,” said Borenstein.
▪ A slower economy. “A recession would affect demand for oil,” said Sung Won Sohn, president of SS Economics, a Los Angeles-based consulting firm.
“If the price of oil keeps rising, eventually consumer buying power would be sapped, causing a recession,” he said. But he suggested another major oil-driven recession is a long-shot.
The average American consumer pays about 3.7% of their monthly income for gasoline, and supply and demand tend to affect how much of that gets passed along in the prices of other goods.
As a result, “my guess is that the price of oil would have to approach $200 for a U.S. recession to occur and bring the price of oil down,” Sohn said.
This story was originally published March 14, 2022 at 10:31 AM.
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