All over America, we have seen the insane prices of gas going up. Although many people want to blame the government for the increased prices, the problem is a lot bigger than the government. Even the gas prices in Canada are hitting record-high numbers! So what exactly is causing these skyrocket prices, how bad are the effects, and what could this mean for your investment portfolio?
The Cause
There are actually a couple of reasons that are to blame for the increased prices. One of them being COVID-19. Even though the pandemic was two years ago, the effects still play a part in today’s economy. See, when COVID first hit, people stayed home which resulted in the prices of crude oil dropping significantly. According to the benchmark West Texas Intermediate index, prices actually fell below $0 in April 2020!
During the pandemic, energy companies started to export their oil to different countries rather than selling oil at super cheap prices. But, when people started driving again and the demand for gas started to rise, companies then realized that the production of gas takes longer than the consumption of it. This caused a tight demand for gas starting last fall. The war in Ukraine did not help the situation either. Many companies sanctioned Russia, which meant no more oil. So now, companies have to replace Russia’s oil. This causes the global price of gas to go up as the supply is restricted. Refineries had to adjust where they get their oil from and due to the fact that it was in low demand, capital investment dropped significantly, and Russia’s oil is high in sulphur so it isn’t exactly easy to be replaced. That’s the same case for America, right? Wrong! The U.S. barely gets any oil from Russia and actually has a lot of oil in places like Texas and Oklahoma. Instead, companies are slow to rush their oil output.
But why? Well, there are actually a couple of reasons. For one, companies are saying that they are having the same issues as the economy as a whole. There are less people available for labor and there is a rise in prices of parts and raw materials that are needed to refine the oil into gasoline.
The other reason is simple: greed.
Companies are also not in a rush to mine oil because they know that less product means higher prices. Companies started to limit how much they invest in new production so they can reward their investors and buy shareholder buybacks. This way, they are making way more money than they were before the pandemic. In fact, during the first three months of 2022, the top oil companies – Shell, ExxonMobil, BP, Chevron, and ConocoPhillips, brought in more than 300% more than in the first quarter of 2021. In that same period, almost 28% of Americans spent $35 billion on gas prices – which is equivalent to how much profits these companies made.
Biden and the government also are not in charge of the oil companies, and due to many rules and regulations of businesses, they cannot simply force these companies to produce more oil.
So what could that mean for your investments?
If the oil companies are booming right now, does that mean it’s a good time to invest? Well, Brent Crude Oil – the international benchmark for oil – recently rose to their highest prices since 2008 earlier this year. Also, investors say that the oil industry probably won’t be hurting this year either. However, there are some things to consider. Rising oil prices means the rising of other things like heating and transportation. The volatility of the market in general is also something that could impact the industry. Overall this market is one to watch for!
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.
