The Reason Gas Prices Are Soaring
We’ve all clearly noticed that our commute to work is not as cheap as it was last year. Gas prices have soared, and even adjusted for inflation, is near a record high. Why is this?
The reason gas prices have gone up is an unlucky two punch combo. First, the price of gasoline is 60% crude oil, and as its price increases, so does the price of gasoline. Since 2014, the price of crude oil hasn't breached $67 a gallon — that is until travel began picking up after COVID slowed production. Oil production isn't like a light switch. As we've experienced across the world with other shortages, ramping up production takes time. So since May of 2020, there's been a steady increase of the price of crude oil as demand has outpaced production. That remains true today. Currently, US oil refineries are running at 90% capacity, and refiners are hesitant to invest the months and the hundreds of millions of dollars necessary to put the rest online for a short-term benefit. Especially when they're making up lost ground from when the likes of ExxonMobil, BP, Shell, Chevron, and Total lost $76 billion in 2020 when oil was cheap.
The second punch that's driven demand is that Russia supplies 30% of the Europe's oil supply, and in some countries as much as 70%. Russia is the second largest supplier of oil in the world, and with the US sanctioning them and the EU posed to phase out oil importation by the end of the year, the world's price per barrel swung upward. Within the first 12 days after Russia invaded Ukraine, prices saw a 35% increase.
In short, the reason costs are going up is because demand is rising for a limited resource.
Rising of gas prices means more things than just painful pump experiences. Consumers and corporations are being affected with importation and exportation costs. However, not only are they being affected by extreme transportation costs but also costs that are indirectly related like construction materials, food, and even diapers.
Huge increases in materials can be devastating for businesses who aren’t prepared to switch gears. Companies that remain agile and learn to pivot in the face of every change will always be better off, and business acumen is that needed tool to survive economic whirlwinds. Being an agile company, learning which levers affect which strategies, and how to effectively have cash on hand are all examples of the necessities that having business acumen knowledge exudes.
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