President Joe Biden’s announcement on Tuesday that the United States will ban imports of Russian crude oil is unlikely to be a sole cause of even higher gasoline prices for Americans, experts say — the United States will not receive only about 1.5% of their crude from Russia.
But if other countries follow suit, cutting off Russian imports as a penalty for invading Ukraine, gasoline prices here could skyrocket.
Texans could see prices of $5 a gallon in this scenario, says Joshua Rhodes, a research associate with the Webber Energy Group at the University of Texas.
And pump pain shouldn’t be going away anytime soon.
The highest average gasoline price ever in Texas was $3.99 in July 2008. We could easily top that record in this surge, experts say. The state average will likely follow the national trend, topping $4 a gallon, starting this week. The state’s average price on Tuesday was $3.86.
“I fear we are facing a higher gasoline price in Texas than any of us have ever seen before,” said Karr Ingham, petroleum economist at the Texas Alliance of Energy Producers.
What effect will the ban on Russian oil imports have on the United States?
Biden announced a ban on Russian oil imports before heading to Fort Worth on Tuesday.
The news won’t have much of an impact on gas prices, experts say. “Our overall imports are small, and Russian imports are only a small portion of those imports,” said Bill Gilmer, director of the UH Bauer Institute for Regional Forecasting.
If so, why are the prices rising?
The main driver of gasoline prices is the cost of crude oil (currently $125 a barrel), which is set globally based on supply and demand. Currently, global demand is greater than supply, which is driving up prices. The possibility that Russia, the world’s second-largest crude oil producer, will produce and export smaller amounts of crude oil to the global market, is causing an even bigger price spike.
“What the markets are doing is sensing the possibility that global supply could drop significantly, just because the amount of crude oil coming out of Russia could drop significantly,” Ingham said.
What role does the oil and gas industry in Texas play?
Texas could help alleviate global oil supply problems.
As the nation’s largest crude oil producer (producing 43% of U.S. crude oil), Texas could ramp up production to fill the gap in global oil supply, according to Ed Longanecker, president of Association of Independent Producers and Royalty Owners of Texas. Currently, Texas is the fifth largest crude oil producer in the world, producing approximately 6% of all crude oil in the world.
“The Texas oil and gas industry has the capacity and should move forward with increased production to address supply shortages,” Longanecker said. “We have had two years of underinvestment in domestic oil and natural gas production. The only way to help balance the market and achieve a balance of supply and demand is to increase domestic production, especially with the announcement of the phasing out of Russian crude oil imports. And our operators are ready and willing to do it.
We will likely set new oil production records in Texas this year, Longanecker says.
“They have a large inventory of wells from which they can start drilling and producing in a relatively short timeframe, which will increase overall production in Texas and address these supply constraints,” Longanecker said.
We will particularly see more production in the Permian Basin, located in western Texas and southeastern New Mexico. It is the fourth largest supplier of crude oil in the world.
With Texas producing more oil, we will see a positive effect on our state’s economy, Longanecker says.
“There will be benefits from an employment perspective, obviously operators will benefit from higher commodity prices, as will royalty owners in the state of Texas, and the state itself will benefit from the higher taxes that support every aspect of our economy,” Longanecker said. noted. “But many leading operators are cautious about ramping up production as they want to avoid the most extreme periods of market volatility we have seen in the past. So there is a balance and we have a long way to go to get there.
Have we ever seen a spike in gas prices like this?
We’ve seen gasoline prices go up like this in Texas three times before during the conflict.
Gas prices soared during World War II and then in 1973 due to an oil embargo imposed by the Organization of the Petroleum Exporting Countries, says Jim Klein, a history professor at Del Mar College.
“Gas prices tend to jump immediately following foreign events, but when those foreign events subside or calm down, the price of gas starts falling again,” Klein said. “There’s a lag of about six months or so before prices start to come down.”
They most recently spiked during the 1979 Iranian Revolution, to around $130 a barrel in today’s dollars.
Texas’ oil and gas industry is historically made much more volatile during wartime, so the state is likely to thrive in the short term due to war with Russia, Klein said.
How long will gasoline prices continue to rise?
“It would be wise for consumers to settle into the notion that gasoline prices are going to be significantly higher for the foreseeable future, and let’s just say the rest of this year,” Ingham said.
For gas prices to start falling, oil supply will have to meet demand, which means the United States will have to start producing more oil.
“The only way to solve this problem,” Longanecker said, “is to increase production, and Texas can take the lead in those efforts, which will eventually help solve those supply constraints.”
But even with increased domestic production, complicated by supply chain issues, it would still take months to bring oil prices down. Iran and Venezuela, oil-producing countries, could also increase their supply to meet global demand.
Another way to lower gasoline prices would be to stop using so much gasoline. It can happen unintentionally if we stop driving so much because gasoline is no longer affordable. Texans could reduce oil demand by buying electric cars or taking other transportation.
According to expert projections, a drop in demand is unlikely to occur. The demand for oil and natural gas will continue to be significant in the decades to come.
Last year, about 70% of America’s energy came from oil and gas. The Energy Information Administration predicts that global energy demand will increase 50% by 2050. And demand for oil and gas will increase 34% during that time.
On the other hand, gas prices could rise much more if Russia cuts its crude oil production by a significant amount – by a third or a quarter. If that happens, we could see the price of crude oil spike to $150 or $160 a barrel, causing gasoline prices to spike. In this case, we might pay $5 or $6 a gallon at the pump.
Gas prices will fall when the war between Russia and Ukraine ends and Russian oil production returns to normal, balancing global supply and demand, experts say.
“While it’s painful, rising crude oil and gasoline prices ultimately mean markets are hard at work trying to fix this,” Ingham said. “Consumers should certainly understand that this is a market at work trying to solve this problem for them by incentivizing additional supply as quickly as possible.”
This story was originally published March 8, 2022 4:55 p.m.