Understanding the Gas Price Rollercoaster

On today's episode of the 5 Things podcast:

We are finally starting to see gas prices going down in some parts of the country and the Biden Administration is touting its part in it, including pointing out that prices at the pump have fallen for 38 straight days. But in reality, how much of an impact does a president have on the cost of gas? According to Patrick De Haan, lead analyst for Gas Buddy and self described gas price myth buster, not a whole lot. In fact, he says the drop in price is being held by a string and that it won't take much to break it.

The team at 5 Things sat down with De Haan to get to the nitty gritty of why the cost of gas is what it is today and what we can expect in the coming weeks and potentially the rest of the year. His answers may surprise you.

For more on articles on gas price coverage, click here, here and here.

To learn more about Patrick De Haan and Gas buddy click here. To follow him on Twitter, click here.

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Hit play on the player above to hear the podcast and follow along with the transcript below. This transcript was automatically generated, and then edited for clarity in its current form. There may be some differences between the audio and the text.

James Brown: Hello, and welcome to 5 Things. I'm James Brown. It's Sunday, August 7th, 2022. Thanks for joining me. Every week we take a question, an idea, or a concept and go deep. If there's something you'd like us to look into, you can always email me at jabrown@usatoday, or podcast@usatoday.com. You could also leave me a message at 585-484-03-39, that's 585-484-03-339. Or find me anywhere on social media at James Brown TV. I went for a test drive at a Kia dealership last weekend, and I was considering trading in my car. So I went through my glove compartment and I found a surprise, some old gas receipts from just two years ago. When I looked at the price, it shocked me, it shouldn't, but it did. I paid $2.53 per gallon, about half of what I spent on gas just a few weeks ago.

It's one of those things that you see and feel and understand, but still feels a bit surreal. There's a tweet pinned at the top of Patrick De Haan Twitter account that tells this tail well better than just about anything I've seen elsewhere. He leaves petroleum analysis for Gas Buddy. He describes himself as a gas myth buster, the foremost expert on issues driving gasoline prices, and he's obsessed with data quality, the kind of guy I like. His username is GasBuddyGuy on Twitter. He saw the decrease in gas prices, common and tweeted about it in early July. Our conversation begins with him explaining exactly how we got here.

Patrick De Haan: As everyone probably well remember, gas prices were quite a bit more affordable back in 2019, 2018, supply and demand were pretty well balanced. Of course, then COVID hit in early 2020, and abruptly changed really everything. Americans stopped driving for several weeks, which turned into really several months. As a result, the price of oil plummeted to negative territory for the first time ever, which basically pushed and forced oil companies to start shutting down production. Essentially given the fact that oil was trading negative, they shut down millions of barrels a day in capacity. They also let go of tens of thousands of their workers, unable to really continue to pay them with the price of oil plummeting and with demand plummeting. In addition, several months after US oil producers started cutting production OPEC, which controls about a third of the world's oil supply also cut production by about 20%.

That is 10 million barrels a day. So very quickly because of the effects from COVID, oil producers shut down output. And as the economy continued to slowly recover, in 2020 demand remained 50% below normal and that caused prices to continue to remain low. All of that abruptly changed when Pfizer and Moderna announced that their vaccines were extremely effective. The stock market along with oil prices started rallying significantly on the hopes that those vaccines would allow us to start returning to normal. And so oil prices started to rally, demands started to go back up, those vaccines started to reopen the economy giving authorities the confidence that they would be effective and they were. And so throughout the summer of 2021, Americans that had been tied down, stayed closer to home, started to get out more and more. And the problem is that demand started to go back up, but supply hadn't budged yet.

And that held through really through the end of 2021. It wasn't until Midsummer of 2021 that OPEC only started to increase production, but it was too late. Demand had been in full recovery mode and by late 2021 demand had largely recovered to close to 10% within normal levels. The problem was oil production was lagging badly behind and the glut and crude oil that had developed in early 2020 was quickly absorbed. And beyond that, oil prices started to surge on the fact that demand had continued to recover faster than expected, and that segued into Russia's invasion of Ukraine in 2022, which then caused the US and other countries to sanction or try to cut off that Russian oil at a time it was badly needed due to the recovery from COVID.

So essentially oil prices saw a super spike to $125 a barrel, that caused prices to go up significantly, and that's where we are today. Prices remain high, though, they have recovered or dropped about 90 cents from where they were in mid-June, there is still an imbalance in the market. Oil prices remain high because production still is not back to where it was prior to COVID at a time that demand has largely recovered.

James Brown: I'd like to take a step back if you don't mind. When you say that oil was a negative territory, can you give us a better understanding of what that is and the effects of that?

Patrick De Haan: Well, for the first time ever during the height of COVID, oil was negative and that oil producers or traders, those that held oil contracts were forced to sell those to somebody and pay them to take the oil. Generally, this happened I think because some oil traders bought oil maybe for 15 or $20 a barrel hoping that they could flip it for a profit, but those oil contracts require them to take delivery. And because of the glut and crude oil that had formed, those that had bought oil for low prices were unable to find places to store it. And because of the requirement that they'd had to take the oil and there was no storage left really anywhere. Those that held those contracts had to sell them and pay somebody to take those contracts because they had no ability to store that oil. And so that pushed us into that unprecedented territory.

James Brown: Am I hearing you correctly that folks have, and do bet on oil?

Patrick De Haan: Well, those contracts represent a thousand barrels, but those contracts require that you take delivery in Cushing, Oklahoma, which is the contract delivery point. The problem is if you take delivery, you have to put it somewhere. And some of these parties that may have been paper traders, they could be investors taking a bet that they could have sold that oil for a profit eventually found out that because there was nobody willing to pay 15 or $20. There was also nowhere to put the oil. So essentially some traders had to sell oil at a loss to get somebody to take delivery of that commodity.

James Brown: The Biden administration has crowed about bringing the price of oil down. In your estimation and the type of work you do, how much actual thumb on the scale can a government do to increase or decrease oil prices?

Patrick De Haan: Not a whole lot. These are private or publicly traded companies that have their own agenda as what determines whether they increase production. Now, they have in many times been incentivized by higher prices of oil, meaning that they would produce more. So a president cannot require oil companies to produce more. His policies may dictate the appetite for oil companies to increase production, but a president has very little control over oil producers and how much oil they produce.

James Brown: In the short term, just looking at your Twitter account from early July, you called that we were headed for a plummet. What do you see in the next couple of months?

Patrick De Haan: Well, just underscoring the fact that the volatility has continued. Because of the imbalances that have persisted as a result of COVID and now Russia's war Ukraine, geopolitical tensions are much higher. And so we could see a drastically different output. Now, where I see things in the immediate short term is I do think that prices will continue to moderate, but that could be quickly offset by a major hurricane that imperils the flow of oil. Keep in mind, demand has largely recovered to pre-COVID levels, but keep in mind, they also said that supply hasn't. And so if we do see something like a major hurricane that could shut down oil production in the Gulf of Mexico, that could very quickly throw prices right back up to where they were because supply of oil has not built back up, production of oil has not built back up.

And much of the reason prices are declining is because the perception that we could see a slowdown in demand as we enter into a possible recession. So my worry is that the drop in price is being held together by string, and it wouldn't take much to break it. So being mindful that a hurricane could change the outcome, or if OPEC suddenly decided to stop increasing production, that could cause price to go up. Not withstanding those two factors, I'm hopeful that this decline held up by string may continue for the next few weeks and maybe into the end of the year as US oil production has been increasing, it's up 900,000 barrels from a year ago. I'm hopeful that the increase in US oil production will continue over the coming months. And by the end of the year, oil production could be back at pre-COVID levels and that could help improve the situation and continue to lead the lower prices.

James Brown: OPEC being the group of nations that control most of the world's oil. Am I articulating that correctly?

Patrick De Haan: That's right. The cartel, the oil producing and exporting countries, many members of which are major oil producers. And keep in mind that OPEC Plus, the new name for OPEC, but also including Russia.

James Brown: And roughly how much of the world's oil do they control?

Patrick De Haan: About a third. OPEC collectively above a third. And when you add Russia into that, it's just under half. So quite a significant sum.

James Brown: I understand they're not always in a cord, but if they are indeed working together, you could have a major swing in the market based on their feelings.

Patrick De Haan: Exactly right. There could be large dramatic swings. Now OPEC has tried to stabilize markets because it is in their interest, right? If oil prices go up too dramatically, Americans are going to be looking for alternatives. So OPEC's mission is essentially a very fine line of charging as much as they can and keeping prices as high as they can without causing demand to permanently move to some other thing, like an electric vehicle.

James Brown: And I'll leave it with this, how insulated is the American market to the swings of oil prices?

Patrick De Haan: Not insulated at all. I don't think there's a single country that is insulated to the global whims of the price of oil. The US is no stranger. Now, we are the world's largest oil producer. So we are somewhat insulated from oil production plummeting somewhere else, but keep in mind, we're also the world's largest oil consumer. So that leaves us vulnerable to the whims of other countries like Russia as well.

James Brown: Patrick De Haan, thank you for joining me.

Patrick De Haan: My pleasure. Thanks for having me.

James Brown: If you like the show, rate us a review on Apple podcast or wherever you're listening and do me a favor, share it with a friend. What do you think of the show? If you have any ideas, comments, or questions, you could always email me at jabrown@usatoday.com or leave me a message at 585-484-03-39. You could also send me a message on Twitter at James Brown TV. I'd love hearing from you. Thanks to Patrick De Haan for joining me. You can find links to his website and social media accounts on usatoday.com or in this description. Thanks to Alexis Gustin for her production assistance. Taylor Wilson will be back tomorrow morning with five things you need to know for Monday. And for all of us at USA Today, thanks for listening. I'm James Brown, and as always, be well.

This article originally appeared on USA TODAY: Understanding the Gas Price Rollercoaster: 5 Things Podcast