Michigan has joined the rest of the country in seeing gasoline prices skyrocket, with the average price per gallon rising 42 cents in a week and crossing $4 per gallon across the state on Tuesday.
However, answers will not come easy or quickly for customers who are paying well over $1 per gallon more than a year ago, following President Biden’s announcement of a U.S. ban on Russian oil.
The global oil market is expected to be more volatile as the situation in and around Ukraine worsens, and it’s uncertain how long that will endure as the Russian oil embargo further restricts access.
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While at least one industry analyst believes prices in Michigan will stabilise by the end of the week, others believe the conflict will pose longer-term issues to the United States’ energy security. And Biden’s new prohibition is expected to drive up prices even further.
At the same time, despite the nation’s return to the roads as the pandemic approaches its third year, U.S. oil output remains below 2019 levels, prompting questions about whether federal energy policy has contributed to the surge and what actions might be taken to mitigate expenses.
“We’re in new area… and that uncertainty is manifesting itself in higher energy prices,” said Mark Griffin, president of the Michigan Petroleum Association (MPA), which represents 400 businesses in the state that operate 1,500 facilities such as gas stations and wholesalers.
Previous gas price increases in response to disasters such as hurricanes have shocked Michigan’s market, according to Griffin, but customers and the state’s fuel business had some certainty that the surges would soon correct themselves. This time, he claims, Russia’s attack on a neighbour and the threat of larger European battles are rebalancing the global oil supply, with increased demand reaching every petrol pump in the state.
“I don’t know what the final point is in this circumstance,” Griffin told Bridge Michigan.
According to AAA, Michigan drivers are paying an average of $4.18 a gallon for regular unleaded as of lunchtime Tuesday, which is about average throughout the country, with California paying the most at $5.44 per gallon.
The price of gasoline in the state is 81 cents more than a month ago and $1.46 higher than a year ago. According to AAA, the highest reported costs are in Marquette ($4.26) and Saginaw/Bay City/Midland ($4.22).
Motorists in Michigan will pay roughly $63 for a 15-gallon tank of gasoline, according to the average price listed Tuesday, a $11.55 rise over last year’s November record.
National diesel prices are also approaching a record, according to GasBuddy economist Patrick DeHaan, who called it “the fuel of commerce in this country” in a Facebook Live broadcast on Monday. It was $4.75 per gallon on Tuesday and is expected to break the previous record of $4.85 per gallon, he said.
DeHaan predicted that the rate of increase will reduce this week, but he did not forecast how high prices would rise: Many people fear it will hit $5 a gallon or higher, but he says it’s one of the “difficult topics to fully answer” because of the ongoing oil swings and armed war.
Despite the fact that Michigan businesses and consumers are feeling the pain, the market for oil — the commodity used to manufacture unleaded petrol and diesel fuel — is worldwide, according to Paolo Pasquariello, a finance professor and economist at the University of Michigan’s Ross School of Business. This complicates pricing and potential solutions.
According to Paolo Pasquariello, a finance professor at the University of Michigan, unpredictable global oil prices might affect several sectors of the Michigan economy. (Photo courtesy of the author)
The United States produces 11.8 million barrels a day, but it also imports and exports to an estimated 174 countries. It imports crude oil from Canada, Saudi Arabia, and Russia. Fortunately for the United States, it is significantly less reliant on Russian oil than its European partners. Russia contributes around 8% of the oil used to make gasoline for automobiles in the United States, but it controls roughly one-third of the European oil market.
Since Russia’s invasion, the price of a barrel of oil has risen from $90 to more than $120, as importers avoid Russian output. Prior to the moratorium on Tuesday, Biden and US allies planned to release 60 million barrels of oil from strategic stockpiles, with 30 million barrels coming from US stocks.
“Oil prices are now looking for a place where demand will fall,” said DeHaan of Gasbuddy, a mobile app that displays real-time gas prices at U.S. service stations. “Americans ought to come together to minimise our fuel use,” he advises US consumers.
In a tweet on Monday, the Michigan Republican Party wondered what Biden and Gov. Gretchen Whitmer, both Democrats, were doing “to provide Michiganders comfort from this economic misery.”
The search for solutions has geopolitical ramifications that go far beyond the petroleum costs Americans must pay. Due to indignation over the Russian invasion, which has driven more than 2 million people from Ukraine as they seek to flee the turmoil, Biden’s restriction on Russian imports has bipartisan support in Congress.
However, as the United States prepares to impose sanctions and other countries avoid Russian oil even in the absence of penalties, Pasquariello predicts that price ramifications from reduced global supply will reverberate in Michigan. Crude oil increased by 6% immediately following Biden’s announcement.
“If the United States and other nations impose an embargo on Russian oil, the global supply of oil will be reduced,” said U-Pasquariello. M’s “As a result, oil prices will rise.”
“And every economy on the planet will suffer as a result.”
Whitmer, who is competing for reelection in November, joined five other governors in writing to Biden and congressional leaders, requesting that the federal gas tax be suspended until the end of the year. On Monday, Republican candidate for governor James Craig asked on the state to suspend collection of the $27.2 cents per gallon state gas tax while gas prices rise.
According to Whitmer spokesman Kayle Hanson, lowering the federal gas tax, which is now set at 18.4 cents per gallon, “would cut expenses at the pump for millions of Michigan drivers who are facing growing costs due to Putin’s brutal actions on Ukraine.”
Griffin of the petroleum sector said tax holidays are tough for merchants and may be difficult for state auditors to approve and track, but he would support a sales tax break.
Suspension of the state’s gas tax, which pays state and municipal road repairs, would cost Michigan around $101 million in revenue per month.
Meanwhile, calls for the United States to allow more domestic oil production are unlikely to result in lower gas prices anytime soon, according to Pasquariello, because new permits for drilling sites, new equipment, and new pipelines may take years to assemble.
Nonetheless, the US Chamber of Commerce has endorsed four policy changes that would allow for quicker pipeline permitting in the US as well as finance that might allow for additional exports.
The chamber also called for the “rapid development and implementation of technologies to decarbonize our economy,” including renewable energy and battery technology, as well as electric vehicles.
“We need a more balanced dialogue about how to have good climate policy while also supporting energy resilience and national security,” stated the chamber in a statement. “We’ve got to be able to do both.”
Pipelines in the United States were around half full at the end of 2021, and it’s unclear how rapidly oil firms can increase volume. With more demand in 2021 than in the first year of the COVID-19 epidemic, many oil producers reported increased earnings in the fourth quarter as they reduced production.
Furthermore, Pasquariello stated that an increase in local production does not ensure an increase in US supply.
“If you increase total supply, you can lower prices,” the U-M economist explained. “However, if global prices do not fall and domestic supply in the United States increases, domestic producers will be able to sell oil abroad, not necessarily for American consumption.”
It’s not just gas prices.
Higher gas costs will not just hurt drivers, but will also have an impact on other sectors of Michigan’s economy.
According to DeHaan, the economist at GasBuddy, diesel fuel shortages have the potential to “impact everything from food to lumber,” even jet fuel for pleasure and freight flights.
Higher gas prices are also affecting gas stations. Griffin of MPA stated that many are currently selling fuel below replacement costs, even at a loss in some circumstances, in the hopes that customers will continue to buy at their convenience stores, where they make 30% of their profits.
“However, they can’t afford to sell below cost for very long and still continue in business.”
Some stations, he continued, have fleet contracts with local school districts or commercial trucks, and escalation clauses in the contracts may not keep up with the month’s quick rises.
Griffin characterised himself as nervous as he evaluated the ramifications for the future.
“I’m concerned about our customers and our businesses,” he added of the petroleum industry. “We have to stick together on this.”
Aside from the Ukraine conflict, another concern for Michigan energy prices is the fate of the Enbridge Energy Line 5 pipeline, which Whitmer ordered shut down but Enbridge is appealing in court.
An industry analysis released last week determined that closing the Straits of Mackinac to Line 5 may result in a 40-cent per gallon spike in the region’s gasoline prices. Environmentalists disagree, citing a February research that stated the impact could be small.
Looking ahead, businesses that are already dealing with inflation at 40-year highs may be further impacted as individuals pay more for petrol, leaving less money for discretionary spending such as eating and vacation.
“Many of the items created in Michigan are sold all over the world,” said U-Pasquariello, M’s noting that the automobile industry is towards the top of that list.
However, Brian Calley, president and CEO of the Small Business Association of Michigan, told members on Monday that while gas costs are expected to harm them, the Federal Reserve may delay plans to raise interest rates if gasoline prices continue to rise. This could help to offset increasing fuel costs.
“If they’re concerned about the economy overheating, nothing will cool it down faster than persistent, high energy prices,” Calley added.
Pasquariello suggested that one method state officials may alleviate increasing gas prices for Michigan citizens is to investigate a low-income gas credit, similar to pandemic relief measures, so that people who can’t afford to bear the higher expenses can find respite.
On a broader level, though, he believes that higher costs could be viewed as a show of solidarity for Ukrainians if the US can avoid resorting to Russian oil to cut prices. Pasquariello emphasised that the people there are struggling for their life.
“If you want to defend Ukraine, you must recognise that the United States is waging the battle economically (rather than militarily),” he stated. “And as a result of that battle, you’ll have to pay.”