We’re Paying More at the Pump. How Long Will That, and High Inflation, Last?

A sign at a California gas station tells the story: the highest inflation in decades has hit oil and gas markets. Photo by iStock/skodonnell
We’re Paying More at the Pump. How Long Will That, and High Inflation, Last?
BU’s Robert Kaufmann says it depends on the Russia-Ukraine war
Average prices surging north of $4 a gallon, up roughly a dollar and a half from a year ago, has angry politicians lambasting “profiteering” oil companies. “That’s pretty nonsensical,” says Robert Kaufmann, a College of Arts & Sciences professor of earth and environment, who studies global oil markets and the factors affecting price.
In fact, you’ll find smarter economic wisdom, he suggests, in the 1983 Eddie Murphy–Dan Ackroyd comedy Trading Places, about a commodities brokerage firm. The film’s setting reminds viewers that the global price of crude isn’t set by secretive price gougers, but “on highly transparent markets,” Kaufmann says. “You can go on the [Department of Energy] website…and see what the price of crude oil is trading [at] on those exchanges, literally minute by minute if you’re that interested. Those prices are then set as a benchmark to price other crude oils.”
Meanwhile, widely varying prices at the pump bespeak the differing business models of gas stations, he says. Some make money off their mini-mart food and beverage sales, and they don’t want high gas prices scaring off hungry and thirsty customers. Stations that make more money off auto repairs have more wiggle room to hike gas prices, he says. And “if you’re in a place that has very few gas stations—read: very little competition—then you’re going to pay more.”
BU Today asked Kaufmann for his assessment of where gas prices are today and where he sees them going in the near future.
Q&A
With Robert Kaufmann
BU Today: How much of the current inflation owes to prewar factors, and how much worse will the Russia-Ukraine war make it?
Robert Kaufmann: Oil prices were rising before the war, in large part because the economy was coming out of the pandemic quite nicely, myself included, [people were] starting to go back to the office, demand for gasoline was rising, factory orders were picking up. When things go well, the demand for oil increases, and that raises price. Inflation is happening all around the world, so you can’t blame it on just President Biden or what’s happening in the US economy. The British economy is having the highest rates of inflation in more than 30 years as well.
BU Today: How high might gas prices at the pump, and the cost of home heating oil, still go?
Robert Kaufmann: It all depends on how the war goes. If the situation doesn’t get more horrible than it already is, then this is the range of crude oil prices and motor gasoline prices that we’ll see for the foreseeable future. If the war takes an even more horrible turn and there are more worries about oil out of Russia, prices could go much higher. I don’t think prices are going to come down anytime soon. Unless there’s some really nice end to this war, I don’t think the United States and Europe are going to end the sanctions on Russia.
BU Today: The war might drag on longer than we or Russia expected. Is that the kind of horrible turn you’re talking about?
Robert Kaufmann: Markets, including the oil market, quickly gather in existing information and put it into the price. So the market has looked around, seen what this war is doing, and has put those conditions into the price of crude oil, motor gasoline, and heating oil.
BU Today: So what we’re paying now reflects realization that this war could drag on?
Robert Kaufmann: Exactly. Now, the one thing that could bring prices down is how bad the COVID surge is. In China, they’re locking down again. That reduces the demand for motor gasoline, crude oil, and that’s exerting downward pressure on prices. Recently, prices for crude oil have dropped below $100 a barrel, and it’s worries about COVID in Asia and perhaps Europe that are driving that reduction. Two years ago, oil prices were negative because the pandemic had so decreased demand that producers literally had to pay people to take their crude oil away.
BU Today: Will President Biden’s ban on US imports of Russian oil hurt Putin if Europe doesn’t join in?
Robert Kaufmann: It was a symbolic gesture on the US part, because we don’t get much from them. There’s a global market for oil, there’s one global price, and it really doesn’t matter where you get your oil from; you’re going to pay that global price. The thought experiment I use to illustrate this is: suppose that the US price were $70 a barrel, and the world price were $110 a barrel. You think US producers would be selling oil to you and me at $70 a barrel, if they could sell it overseas for $110?
The clearest example is, we’re soon going to be paying more for bread and pasta because global wheat prices have risen. Russia and Ukraine are major wheat producers; the United States produces all the wheat it needs, but yet we’re going to pay a higher price. So this idea of reducing imports, especially from unreliable suppliers—that’s like political theater, but nothing more. It doesn’t have a real-world effect.
BU Today: What do the tea leaves tell us about how long-lived this inflation is apt to be?
Robert Kaufmann: That’s [something] that I’m less expert in. Hopefully, the worst of the pandemic is over, and we’re going to straighten out these supply chain issues. And that will start to alleviate this upward price pressure.
BU Today: Will we see double-digit inflation, as some analysts predict?
Robert Kaufmann: Maybe for a month or two, but I don’t see a return to the 1970s. As I said, a lot of what we’ve seen is due to supply chain issues. And the Federal Reserve has learned a lot of lessons from [the ’70s]. I graduated in 1979 into one of the worst job markets ever, but the people who study that in detail have really learned a lot in terms of what to do and not to do when confronted with elevated inflation. We’re not dumber than we were in the late ’70s or early ’80s, so maybe we’re smarter.
BU Today: Will spiking costs for fossil fuel speed up the transition to clean energy sources?
Robert Kaufmann: That could be the silver lining. Europe has embarked on this crash program to get off Russian natural gas. They’re going to do it by building a lot more windmills and solar. Here in the United States—I don’t like to rub it in on my friends, but I drive a Chevy Volt, an electric car. I’m paying the equivalent of, like, a buck-twenty-five a gallon of gasoline. And I also have those above-ground heat pumps; that allows me to not burn $5 oil in my furnace, so long as air temperatures are 40 degrees or above.
So there are definitely ways to get off of this oil rat race. When you look at more than 100 years of history, oil prices are among the most volatile of any commodity. We’ve wed ourselves to these tremendous ups and downs. You can get off of that treadmill by buying an electric car, by heating with heat pumps—not resistance space heating. The problem is, awareness of this is coming in the middle of pandemic supply chain issues, where it’s really hard to buy an electric car [or] heat pumps.
BU Today: In the short term, what can governments do to ease the price pain from oil and gas, and how long will relief take to show up in our bills?
Robert Kaufmann: Some states are suspending their gasoline tax. That would be some relief. The other thing people can do is, you don’t need to get in your car for every trip. I ride my bike 10 miles each way to and from BU. I’m not saying everybody should do that, but when you go to the grocery store, or your kids want to play soccer, you don’t have to drive them the three miles to the field; you tell them, Get on your bikes and go. The other thing is, people should be encouraged to ride mass transportation.
What we know from research is: consumers search harder for the lowest price when prices get high. Ride that bike, and keep your eyes on the price sign.
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