By Brandon Ladd

Gas prices are stabilizing after being on the rise for the past several months in Oswego, with prices sitting between $4.19 and $4.29. 

The Oswegonian recently had questions for economics professor Elizabeth Schmitt about the prices and the impact on students. Schmitt shared the principles behind the current gas situation and insight on how students can budget them into life at college. 

Q: Are the rises in gas prices all because of foreign policy or was there an economic signal the last six months that Americans missed?

A: Gas prices were on the rise months prior to the invasion of Ukraine. I would not agree that we “missed” these signals, as the price increases have not gone unnoticed. In fact, the run-up in prices is especially noticeable given the steep drop in gas prices as the pandemic started. As with any price change, we can see causes in the demand and supply sides of the market.

Let’s consider some numbers here. Consider data on gasoline price, called US Regular All Formulations Gas Price. This is a national weighted average of over 900 retail sellers.

In January 2020, COVID is well underway in China, affecting global demand for oil. In the U.S., gasoline was $2.60 per gallon. By May 2020 it is down to $1.79. That is a fall of over 30% in less than 6 months. Why? With pandemic restrictions, demand plummeted.

By Spring 2021, vaccination is hitting its stride, and demand for gasoline starts to rise again. From May 2021 to March 2022 it has risen from $2.89 to $4.24 per gallon. So the trend of rising prices precedes the war in Europe and has mostly been driven by the economic recovery and rising global demand for energy.

But there are also supply-side factors as well–domestic oil producers in the U.S. got burned by the plummeting oil prices in 2020 and are reluctant to step up production.

Q: When it comes to college students trying to buWdget for higher gas prices, is there any advice you would give them?

A:  When the price of an item in your budget is rising faster than others, you have two choices: (1) substitute away from the item and/or (2) cut back on other spending.

This is tough here because gasoline is not a luxury and has no good substitutes. The key here is conservation. When do you need to drive? When can you carpool or use the bus, as the Centro bus is free to Oswego students around town? The weather is getting better, so walking is an option too. If your budget is fixed, then other luxuries have to go–entertainment, travel. But I am not trying to minimize the financial stress of this price increase on low-income households. There are no good answers.

Q: Do you personally believe gas prices will fall or rise from this point in time? Or have you seen any forecasting that is showing a trend?

A:  Oil prices show a long-run tendency of mean-reversion. This means that prices revert to a long-term mean price. Prices much higher or lower than the long-term average price are temporary. 

This means gasoline prices exhibit similar behavior. Gas prices will fall in the coming 1-2 years, barring other events.

Once you control for inflation over time in all goods and services, the REAL price of gasoline is significantly below its peak. In 2022 dollars, gasoline was $5.30 in June 2008–much higher than today.

There are two factors at play in the coming months. 

From the supply-side, will domestic and OPEC producers increase crude output? Russian sanctions are here to stay for a while because Russia does not appear to be backing down. However, OPEC members will not be able to resist the temptation of production increases with the price of crude over $100 per barrel. Furthermore, U.S. domestic production is more feasible at higher oil prices, so we will see an increase here as well. But these reactions take some time. Worker shortages and reluctance to invest in fossil fuel also complicate domestic production. It is also clear that oil companies are more interested in profit margins per barrel rather than overall output.

From the demand side, if global economic activity slows down, then the demand for energy, including crude oil will slow down. But as we approach summer, gasoline demand traditionally rises.

The net effect is unclear, but I expect little short-term relief, with increases into the summer.

Brandon Ladd | The Oswegonian