"Beware of false knowledge; it is more dangerous than ignorance." ~ George Bernard Shaw
Why are gas prices going up in 2021? While it would be easy to blame politics, this explanation would ignore the largest impacts on the price of gas, such as those factors affecting the supply and demand for oil. Blaming politics is a classic case of confusing causation with correlation.
So, if you don't mind taking five minutes to learn what causes gas prices to go up, plus find a healthy perspective from which to view it, here's your opportunity.
What Causes U.S. Gas Prices to Go Up?
Before we address what's causing U.S. prices to go up in 2021, let's cover the timeless basics. Put simply, gasoline is a refined product that uses oil as its base commodity. Thus, the fundamental reason for a higher price for gas at the pump is a higher price for oil. What causes the price of oil to go up? There are several factors that impact the price of oil, most of which are related to the economic law of supply and demand.
Here are the primary factors that impact the price of oil and how each factor works:
Supply of Oil: The price of gas generally moves in the opposite direction of the supply of oil, assuming the demand for oil remains constant. Thus, a higher oil supply translates to lower prices at the gas pump and a lower supply means higher gas prices.
Demand for Oil: The price of gas generally moves in the same direction as the demand for oil, assuming the supply for oil remains constant. Thus, higher demand for oil translates to higher prices at the gas pump and lower demand means lower gas prices.
OPEC: The largest producers of oil, collectively the Organization of the Petroleum Exporting Countries (OPEC), naturally have the greatest power over the price of oil because they control the supply. Put simply, OPEC can announce a change in supply and almost instantly affect the price of oil.
Global Economies: As the economy goes, so goes the price of gas. This is because the demand for oil generally follows economic growth. When economies around the world are growing, industrial production and consumer demand for oil are expanding. And the opposite is true. For reference, according to Gas Buddy, the price of gas during the worst of the Great Recession (12/29/2008) was $1.59. The lowest average during the Covid-19 shutdown (04/28/2020) was $1.75.
Market Activity/Investor Speculation: The price of U.S. gas is impacted by the buying and selling of oil (not in physical form but as derivatives) on the open market. Investors may speculate that the price of oil will rise in the future; therefore, they may buy options contracts. This activity in itself drives up the price of oil, even if there is no underlying economic reason.
U.S. Gas Refinery Output: Although this isn't directly related to the supply of oil, it is related to the supply of gas. If gas refineries in the U.S. are producing less gas, the supply of gas goes down and the price of gas tends to go up. The opposite is also generally true.
U.S. President: World leaders, especially in countries that are not major producers of oil, have very little impact on the price of oil. This includes the U.S. President. However, political policies can influence the price of oil in the short term. For example, rising tensions between the U.S. and the Middle East can cause the price of oil to spike upward in the short term.
Why Gas Prices Are Going Up in 2021
The rise in gas prices in 2021 is due to a combination of factors, mostly related to supply and demand. However, every economic and market environment is unique. For example, for multiple reasons, oil prices reached historic lows in 2020. From these lows, many of the classic influences causing oil prices to rise compounded a faster rise in gas prices.
- Price of oil normalizing after record lows: US gas refinery capacity reached record high levels in January 2020. OPEC oil output hit a 30-year high, beginning with the Saudi Arabia vs Russia oil price war that began early March 2020. Covid-19 economic shutdown reduced US consumer demand for oil to the lowest level in decades. In translation, 2020 was a year where record high supply combined with record low demand, causing record low oil prices. In 2021, with downward pressure on the price of oil removed, gas prices are then free to naturally resume higher.
- In January 2021, the price of oil sharply increased on news that Saudi Arabia cut oil production by 1 million barrels a day. This is a case in point on how OPEC can manipulate prices by changing output (in this case, decreasing the supply to increase the price).
- Changes in oil prices are seasonal every year. Lows typically occur toward the end of the year and a gradual rise in oil prices occurs in late winter through the summer travel season. Price increases may extend through hurricane season. Thus, the seasonality effect on oil prices will generally have them rising from early February through late October.
- In late February 2021, multiple US oil refineries were shut down due to the historic Texas cold weather freeze, which pushed U.S. gas prices higher.
- President Biden pulling out of the Keystone Pipeline deal likely contributed to a higher price for oil but not because of a disruption of supply or change in demand. The Keystone deal was intended as a means of transporting oil from Canada (via pipeline) down to the U.S. Yes, a higher cost in moving oil from one place to another (via train, instead) can impact the price of U.S. gas. But since a change in how oil is transported does nothing to change the supply from its original source, nor does it change demand, this impact is minor. Instead, the Keystone takeaway may have impacted oil prices more through influencing market speculation than from other economic factors.
- Market speculation has been a big impact on the price of oil in 2021. Since oil is a commodity that can be traded on the open market through options and futures contracts, the price of oil can move based solely on guesses about future movement. Thus, if speculators think oil prices will move higher in the future, they may buy derivatives to benefit from this move now. For example, early in 2021, investors bid up the price of oil because of speculation about increased demand later in 2021. More recently oil prices rose on concerns over supply cutoff from the Suez Canal blockage.
Bottom Line: Don't Worry; Be Happy
Rather than complain or worry about higher gas prices, you can choose to rejoice in them. Why? Because higher gas prices, in absence of world conflict, generally point to expanding global economies. Think about this for a moment. As illustrated above, the two lowest price points for gas in the past 13 years have occurred during the absolute worst economic conditions in a generation. Thus, if you are wishing for lower gas prices, be careful what you wish for!
You have the power to choose your own beliefs and how you view the world. I'm writing a book on this subject (the philosophy and science behind the power of perspective). As Holocaust survivor and 20th century psychotherapist Viktor Frankl teaches, "human beings are deciding beings." He taught his fellow Holocaust survivors and his friends, family, and patients to attach meaning to suffering.
Thus, if you are unhappy about higher gas prices, attach a happy meaning to them. If gas prices are moving up, chances are that other areas of your financial life are improving. For more on attaching meaning to suffering, read Frankl's epic book, Man's Search for Meaning.
Kent Thune is a philosopher who happens to be a wealth manager and a Certified Financial Planner (TM). Serving clients all around the U.S., Kent is owner of Atlantic Capital Investments, LLC, a registered investment advisory firm located in Hilton Head Island, SC. Kent is also a freelance writer and his works have been published on multiple investing websites, including MarketWatch, Yahoo Finance, Kiplinger.com, InvestorPlace.com, and The Motley Fool.
