Gas Prices Have Crept Higher This Summer, a Challenge for the Fed

Your eyes are not deceiving you: Gas prices are rising yet again. On Wednesday, the national average for unleaded gasoline was $3.88 per gallon, according to AAA, the highest level in nearly a year.

That’s far below the peak in June 2022, when the average briefly ticked above $5 a gallon after Russia’s invasion of Ukraine crimped global oil supplies and sent fuel costs skyrocketing. But it’s still much higher than historical averages, even for summer, when prices tend to rise.

It has been a slow but steady increase. The price of a gallon of gas has risen around 20% since the start of the year and more than 8% since June 1, according to AAA. After Russia’s invasion of Ukraine in February, by comparison, gas prices soared more than 40% in less than four months.

The national average masks some big differences around the country. In California, gas prices have climbed more than 10% in just the last month, to an average of $5.79 per gallon. In Georgia and Florida, prices have fallen in the same period, to $3.36 and $3.67.

High gas prices are a headache for elected officials and consumers, particularly less affluent Americans, and they present a challenge for policymakers at the Federal Reserve, who have sought to rein in rapid inflation over the past 18 months.

But gas prices don’t factor into “core inflation,” a measure closely watched by the Fed that strips out energy and food prices because of their volatility. As Chair Jerome Powell put it Wednesday, energy prices “mostly don’t tell you about where the economy is going.” Still, Powell acknowledged that they’re important in forming consumer sentiment and expectations.

“Energy prices being higher is a significant thing,” Powell said Wednesday, adding that higher, sustained energy prices over time can affect consumer spending.

Here’s what you need to know about what’s causing the recent spike at the pump and where gas prices could go next.

<b> What’s causing the increase? </b>

Gas prices are primarily influenced by the price of oil on commodity markets, which means they can be affected by a variety of factors, including geopolitics, the weather and the mood of financial investors.

Crude oil prices have jumped in recent months. Since June 1, the American crude bench mark, West Texas Intermediate, has climbed nearly 30%. By Wednesday, it was trading at more than $91 a barrel, the highest level since November 2022.

One reason is that Saudi Arabia and Russia have cut production through the end of 2023. Another is that despite China’s economic downturn, it has continued importing oil at a high rate to mitigate geopolitical risks and shore up its manufacturing and transportation industries, said Clay Seigle, director of global oil services at Rapidan Energy Group.

The unusually hot summer in the Northern Hemisphere also contributed. The heat led to reduced production capacity at refineries, said Aakash Doshi, head of commodities in the North America division at Citi Research.

The recent jump in prices in California, which accounts for one-tenth of U.S. gasoline consumption according to the Energy Information Administration, is partly a result of the maintenance of refineries. The state typically has the highest prices in the country in part because the state’s environmental regulations require a unique blend, making supplies tight.

According to Patrick De Haan, head of petroleum analysis at GasBuddy, an app that tracks gas prices at stations across the country, at least four refineries in California have had problems in the last few weeks that have led to interruptions in service.

And the Strategic Petroleum Reserve — which President Joe Biden has tapped to help drive down oil and gas prices — is historically low. The government has delayed restocking the reserve because of high prices and is unlikely to do so until prices fall from where they are now.

<b> The pressure could ease, though. </b>

In most states, the fall brings with it a switch to a cheaper blend of gasoline containing more butane (California makes this change in October). Gas prices also tend to drop during the fall as demand retreats after peak driving season.

“The worst has passed in terms of high gas prices and the effects they have on consumers,” said Tom Kloza, global head of energy analysis at Oil Price Information Service.

Global economic growth is also projected to slow in 2024, which means there will be less demand for oil, pushing gas prices back down, Doshi said.

The production cuts from Saudi Arabia and Russia may not continue into the new year, some analysts say, potentially removing another pressure point.

The cuts, which drove prices up by restricting supply, have already been lucrative for the world’s major oil producers, known collectively as OPEC+. That means, Seigle said, that there is not much need for the oil producers to extend the cuts for a prolonged period, which could lead to excessive energy price inflation and depressed consumption.

“They should be looking at today’s oil market through the lens of ‘mission accomplished,’” Seigle said.

This article originally appeared in <a href="https://www.nytimes.com/2023/09/20/business/gas-prices.html">The New York Times</a>.