By William Midkiff
It’s been difficult to ignore the drastic increase in gas prices over the last few months, and many people understandably have lots of questions about the situation.
Otis Gilley, head of the department of economics and finance at Louisiana Tech, said the gas and oil industry is very complicated, and an incalculable number of factors affect price. This does not mean, however, that he cannot attribute the recent increase to a few key factors, the first being the aftermath of the COVID-19 virus.
“Demand for gas has increased as we emerge from the lockdowns and restrictions that were imposed during the pandemic, and people are going out and traveling more,” Gilley said.
The reason that the pandemic was able to affect demand can be traced to the willingness of consumers.
“In general, anything that affects the buyers’ willingness and ability to buy will cause a change in demand,” Gilley said. “Likewise, anything that affects the sellers’ willingness and ability to sell will cause a change in supply. When either demand or supply or both change, the result is a change in price.”
As the population became more willing and able to use their vehicles, the demand for gas increased, and thus so did the price. But the change over the last few months has been staggering, and the rate at which COVID-19 restrictions have been lifted has been relatively slow.
Gilley addressed this inconsistency by elaborating on another global development that has affected the gas market in an even more direct and noticeable way.
“The turmoil in Europe has created a great deal of uncertainty in a broad category of markets and in the oil market in particular,” Gilley said. “Uncertainty about the general availability of any commodity usually results in rising prices. Gas prices were rising well before the conflict between Russia and Ukraine began, but that conflict has certainly accelerated the rise.”
This amounts to two overarching reasons for the gas price increase thus far: the pandemic and the conflict in Europe. These two events affected the market by increasing willingness and increasing uncertainty, respectively.
This goes to show how fragile an economic market can be, with the price increase ultimately being attributed to simple human emotions, reactions to larger physical events. Gilley also touched on a third emotion affecting the market – expectation – by providing a simple example.
“Suppose you owned a producing oil well and the price of oil today was $50 per barrel,” he said. “If you expect the price of a barrel of oil to be $100 in six months, you would probably prefer to slow your current production and save it for the future when the price is higher. This reduces the current supply of oil and gas and drives up the price of gas.”
This effect may cause the price increase to snowball even further, although Gilley imagines that the future of the gas market is more heavily dependent on the conflict in Europe.
“Forecasting is not my specialty, but it is my guess that prices will continue to rise over the next year,” Gilley said. “But if the situation in Europe calms down, I would expect the rate of increase to be much slower.”
Overall, the gas and oil market, like any, is controlled by the decisions of those who agree to become involved in it – the producers, the consumers and all parties in between.
“Prices are determined in markets where buyers and sellers interact and engage in a voluntary exchange,” Gilley said. “No one forces buyers to buy or sellers to sell, so the interaction and resulting outcome balances opposing forces.”
Any event that stirs emotion globally can and will affect the economy because it will affect these interactions. And the most intrusive, emotional event at the moment is the war between Russia and Ukraine, resulting in a massive spike in gas prices.
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