Why is Gas so Expensive?

Gas is really expensive. I mean REALLY expensive. Right now in Saskatoon, gas costs between $1.68 and $1.78 per liter for Regular. It is a little bit cheaper in Regina where Regular gas is selling anywhere between $1.57 and $1.78 per liter. That means it will probably cost you between $60 and $70 to fill up a small car. But why? Why is gas so expensive? The bottom line is the market price of oil. These days, oil is well over US$100 a barrel and that is the most expensive oil has been in years!

Why is gas so expensive?
Remember when oil was worth less than $0 per barrel? Gas was still expensive because it had to be manufactured and delivered to the pumps.

Is gas so expensive because of the pandemic?

Yes and no. The price of oil fluctuates based on supply and demand, but oil prices were in the dumpster long before the COVID19 pandemic began in 2020. We all remember the big oil crash of 2014 to 2016 when the Prairie economy received quite the unwelcome shock. Not only did the price of oil drop by 70%, but oil prices stayed low for the longest period since 1986. Oil workers from all over the Prairies were out of work. It was a disaster. Then, just as we thought things might pick up again, the pandemic hit. Both price and demand demand for oil sank.

While the pandemic helped suppress the price of oil due to reduced demand, demand has started to increase again. Right now, factories are starting up again and manufacturing is resuming. Barring another COVID19 wave, the demand will only continue to increase as life returns to normal. As the production of oil has been lower than usual, the supply has been stretched. That normally causes a spike in price until the supply and demand get back into balance.

Too much oil keeps prices low

The oil crash of 2014-2016 was caused by a glut of oil on the world markets. Whenever there is too much supply of anything, prices tend to get lower. The oil patch may have been booming, but so was U.S. Shale production. In fact, the U.S. which is the highest producer of oil in the world, had doubled their production of oil between 2012 and 2020 when the pandemic hit. In 2012, the U.S. was producing around 6,000 BBL/D/1k, but by 2020, production was nearing 12,000 BBL/D/1k. That is a huge increase in supply that outpaced demand.

Why is gas so expensive?

When the pandemic hit, everything shut down, including oil production. Almost immediately, U.S oil production dipped to below 10,000 billion barrels per day. That was necessary because demand for oil disappeared. Factories were shut down, and people stopped commuting, so there was considerably less need for oil. Despite the U.S drastically cutting production, the price of oil continued to drop until the point where it cost more to manufacture a barrel of oil than it could be sold for.

Will drilling more oil help?

Probably not. The cost of oil production is rising. The reality is that producing more oil in the U.S. will not necessarily lead to lower gas prices and there is no shortage of permits to allow oil companies to increase production. For various reasons, the oil companies do not want to produce more. One of the most obvious reasons is because OPEC might cut production if North American production increases. The absolute last thing that OPEC cares about is whether Buddy in Saskatoon has to pay $60 bucks for a tank of gas.

Oil companies want to keep prices high. They do not actually care that low income earners pay over 60 bucks for a tank of gas. Extracting oil is expensive and if the price of oil is too low, they might as well leave it in the ground. The Alberta oil patch stopped being profitable when oil prices crashed in 2014 and extracting U.S. shale oil only became profitable after developing more economically efficient methods and equipment.

These oil companies also have their shareholders to answer to. Investors shy away from poor returns and lack of growth. Oil needs to be above $100 per barrel to keep Wall Street happy. There are dividends to pay and those Russian oligarchs need their yachts.

Will gas get even more expensive?

Absolutely. You can bank on it. Despite the fact that supply frequently outstrips demand, the reality is that the world is running out of oil. Unless the U.S. finds more deposits, they only have 5 years of oil left. The rest of their current consumption needs must be imported. In 2016, for example, Americans were consuming over 19 million barrels per day, but they were only producing a little less than 15 million barrels per day. Meanwhile, they exported nearly 600 thousand barrels per day. .

Can they get that extra oil from Canada? Maybe, some of it. Our oil reserves are the 3rd largest in the world and account for over 10% of total global reserves. Canada also has a lot more oil to spare as we only produce 1% of the total proven oil reserves and at our current rate of consumption, we have 188 years of oil reserves left. Although we export about 40% of our production, we consume much less than we are producing.

While we have enough oil to make it through the bulk of another couple of centuries, this asset will only last that long if we limit exports. Every year that we export our surplus production into the hungry maw of global demand, we shorten the longevity of our oil reserves. Eventually, we will run out of oil, just like everyone else is. So unless they find oil on Mars, (unlikely and uneconomical by the way), we need to develop some other ways to produce energy. In the meantime, the price of gas will keep rising.

Want to ‘stick it’ to Big Oil? Convert to solar and get yourself an electric vehicle.

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