Oil prices in general have surged to above $100 per barrel, and in the wake of the Russian invasion, WTI crude oil hit $130 per barrel. The move in oil prices were driven by solid demand coming off the pandemic lockdowns and the lack of supply, as oil companies have yet to invest in producing more oil. While crude oil is not used directly by consumers, products refined from petroleum, such as gasoline, diesel, and propane, are byproducts that can affect our daily lives.

Why Did Oil Prices Surge?

Oil prices were moving higher before the invasion of Ukraine by Russia. They bottomed out in April 2020, as lockdowns generated a lack of demand, forcing producers to stop supplying oil. Slowly prices started to regain traction, and by June 2021, crude oil prices had recovered their pre-pandemic levels.

As vaccines started to roll out, global economies were back on the move, with people driving and flying to destinations around the globe. Demand in the world’s largest economy has recovered to pre-pandemic levels, but the supply has yet to accelerate. Investment in crude oil production has lagged as governments worldwide have focused on alternative energy sources such as electricity generation.

Before COVID-19 in the United States, oil production hit a record high above 13 million barrels a day. After the lockdown, production dropped below 10 million barrels a day. Oil companies appear to be concerned about investment in oil production. As car companies announce they are planning to manufacture electric vehicles and move to a carbon-neutral stance by 2035, oil companies have little incentive to make a large investment in more crude oil production.

General Motors has said that they have pledged to end all petrol-related sales by 2040 worldwide. The move toward electricity has come just as demand has surged, and few oil companies have committed to increasing their oil production. Oil companies don’t want the prices to rise to demand destruction, but their investors do not want to put money into a venture where the underlying product is getting phased out.

How Does Higher Crude Oil Impact the Consumer?

The production of oil is purchased by the refiner who makes byproducts. These products include gasoline, heating oil, and propane. Gasoline is, by far, the most significant byproduct, and is used by people around the globe to fill up their cars that use combustion engines. About 50-60% of the oil price generates the price of gasoline. The balance is taxes and refining costs, as well as storage costs. Each part of the supply chain takes its cut throughout the refining process and storage process, which the consumer eventually pays. While the tax rate is unchanged, the higher the underlying price the higher the tax. For example, if the tax rate is 10% when the cost of gasoline is $3 per gallon, the taxes are $0.30, but when gasoline is $4 per gallon, the taxes are $0.40.

Additionally, gasoline at the pump tends to remain elevated when oil prices rise. When a petrol station purchases gasoline, they tend to sell it at a small profit and keep the price the same until they rebuy gasoline. The station, which serves the consumer, is generally unwilling to move prices down and back up again when there is a change in prices. Most of the time, gas stations will have 1-2 weeks’ worth of gasoline. So, the price at your local pump will remain stable until the retail station repurchases gasoline.

How Do Higher Gasoline Prices Impact the Consumer?

When you go to the pump and purchase gasoline, higher prices are like a tax. Most people who drive have consistent routes to work or school or as a livelihood (like an Uber driver). If the costs rise but your revenue does not offset these costs, you will have to reduce your discretionary spending, in some cases to pay for the higher costs of gasoline. In the United States, where the country consumes 10 million barrels a day at its peak during the summer, higher gasoline prices can impact your vacation plans or your willingness to spend on other items.

The Bottom Line

The upshot is that the surge in oil trading prices has directly impacted the consumer. While consumers do not purchase oil directly, they buy byproducts such as gasoline. Oil prices drive about 60% of the cost of gas. Higher gas prices act like a tax since most people need to go to work or school or as part of the job. The impact of higher gasoline prices is to lower discretionary spending. Higher oil prices are a function of lower production, a quick rebound in consumption, and the lack of investment in oil production. With car companies focusing on electric vehicles, it is a tough sell to oil companies to produce more oil when they know within 20 years, most vehicles will be electric.