Europe’s Energy Crunch Drives Up U.S. Gas Prices

Kiplinger's Economic Outlooks are written by the staff of our weekly Kiplinger Letter and are unavailable elsewhere. Click here for a free issue of The Kiplinger Letter or for more information.

If you already subscribe to the print edition of the Letter, click here to add e-mail delivery and the digital edition at no extra cost.

Have oil prices peaked, now that the United States and other countries are planning to release barrels of crude from their strategic reserves? The U.S. alone says it will release 50 million of the roughly 600 million barrels it holds in underground storage, as a hedge against sudden supply disruptions. This Strategic Petroleum Reserve was conceived as a source of supply to draw on in emergencies, and right now, there is no emergency. But oil and gasoline prices have been rising, helping to spur inflation, and that has apparently convinced President Biden and other leaders of petroleum-importing countries to try to bring down prices. So far, it may be working. Benchmark West Texas Intermediate was recently trading near $79 per barrel, down from the mid-$80s not too long ago.

Looking ahead, we see oil prices edging down, but not because of government actions to bolster supply. Global oil production keeps slowly rebounding from the drop caused by the coronavirus pandemic last year. In the U.S., which remains the world’s top producer, energy firms keep putting new drilling rigs to work, slowly but steadily, and domestic production has been trending higher. OPEC and its partners have been upping their exports in a slow, measured way. Meanwhile, the resurgence of COVID-19 in Europe and elsewhere figure to weigh on fuel demand to some extent, as people travel less. We look for WTI to trade near $75 per barrel this winter, perhaps in a range of a few dollars above or below that mark.

Gasoline prices are near their highest level in years, but they should start to retreat, ever so slightly. At $3.40 per gallon, the national average price of regular unleaded is actually down a penny from a week ago (though it’s still painfully high, compared with a year ago). We look for prices at the pump to slowly retreat as winter begins, though the national average is unlikely to fall below $3. Diesel, now averaging $3.64, probably won’t fall much, now that cold weather is firing up demand for heating oil, diesel’s close chemical cousin.

Prices of natural gas are still high, but no longer climbing as they were earlier this autumn. Mild weather late into the season allowed the U.S. to build up its gas stockpiles to a reasonably healthy level, easing concerns about possible supply shortfalls during the winter. Colder-than-normal weather could still send prices higher again, but barring that, we look for gas futures contracts to hold at or a bit below $5 per million British thermal units. The biggest weather-related price risk may actually be in Europe and Asia, since energy markets are so tight in both regions. If severe cold hits either or both of them, high demand for liquefied gas from the U.S. could cause domestic prices to jump sharply.