economy

Why Are Gas Prices So High If the U.S. Is Energy Independent?

Unfortunately, energy independence can’t keep U.S. gas prices down, and it isn’t enough to protect your stock portfolio either. Here’s why, and what worried investors should know.

We’ve all seen the rising cost of oil and its ripple effect through the economy, especially on prices at the pump. You may have also read that the U.S. is energy independent or that we export more oil than we import and that Russian oil only makes up 3% of all U.S. oil imports.

So why are oil and gas prices so high in the U.S.? The national average price for a gallon of regular gasoline was $4.24 as of March 30, up from $2.87 a year ago, according to AAA.

Prices Are Global, Not Local

A fundamental economic concept called the law of one price can help us understand what is going on. In short, this concept explains that even though the U.S. produces more oil than we use domestically, we buy and sell it on the global market. This means that buying pressures and supply shortages in other parts of the world impact the cost here, even if we produce oil here and use it here. In fact, there is money to be made if you can buy oil in the U.S. at a different price. You could buy in the U.S. then sell internationally and profit from the price difference.

It’s precisely this market force that causes oil — or any other commodity — to trade at one price worldwide. So, even being energy independent, we are still affected by the behavior of the (other) largest oil-producing nations (including Russia, Saudi Arabia, etc.).

A bar chart show the top oil producers, listing United States first, followed by Russia, Saudi Arabia, Canada, Iraq, China, the UAE, Brazil, Iran and Kuwait.

Courtesy of Adam Grealish

Source: U.S. Energy Information Administration

What Does This Mean for Your Portfolio?

Besides the pain at the pump, higher oil prices can erode buying power as input and transportation costs for goods and services rise. Protecting one’s portfolio from inflation can be an imperfect science. Gold, commodities, Treasury inflation-protected securities (TIPS) or even bitcoin all offer some level of peace of mind, but each has its quirks.

While not a direct hedge, investors may also want to consider allocating more dollars to companies involved in renewable energy. Over time, as fuel costs rise, one can expect a greater focus and demand for sustainable energy alternatives.

The implications for sustainable energy go beyond climate impact. Russia’s invasion of Ukraine has cast oil dependence in sharp relief, as oil revenue powers the Kremlin. Less demand for oil can mean less dependence on and funding to Russia, as well as other countries whose practices and policies may not align with investor values.

Natural resources may be randomly distributed around the world, but your investments don't have to be.

About the Author

Adam Grealish

Head of Investments, Altruist

Adam Grealish serves as Head of Investments at Altruist, a fintech company on a mission to make great independent financial advice more affordable and accessible. With a career rooted in financial innovation, Adam most recently led Betterment's strategic asset allocation, fund selection, automated portfolio management, and tax strategies. In addition, he served as a vice president at Goldman Sachs, overseeing the structured corporate credit and macro credit trading strategies. 

Most Popular

Should You Consider a Roth Conversion While the Market is Down?
Roth IRA Conversions

Should You Consider a Roth Conversion While the Market is Down?

Investors who are hurting right now as the stock market takes a hit may want to console themselves with a possible tax bargain created by a Roth conve…
May 16, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
10 Substantial Stock Splits to Put on Your Radar
stocks

10 Substantial Stock Splits to Put on Your Radar

Stock splits can provide a short-term boost for investors. Here are 10 of the most notable names splitting their shares this year.
May 13, 2022

Recommended

Hockey Star’s Viral Twitter Rant Targets Wealth Management
personal finance

Hockey Star’s Viral Twitter Rant Targets Wealth Management

NHL great Chris Pronger took to Twitter recently to critique athletes’ spending and investing, warn of predatory financial advisers and offer smart mo…
May 18, 2022
Are You Maximizing Your Tax-Exempt Bucket?
tax planning

Are You Maximizing Your Tax-Exempt Bucket?

Remember the child’s game hide-and- seek? As adults, most of us are still playing it. The difference is this time it’s with the IRS.
May 17, 2022
Should You Consider a Roth Conversion While the Market is Down?
Roth IRA Conversions

Should You Consider a Roth Conversion While the Market is Down?

Investors who are hurting right now as the stock market takes a hit may want to console themselves with a possible tax bargain created by a Roth conve…
May 16, 2022
Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider
IRAs

Thinking about Rolling Your 401(k) into an IRA? 7 Deciding Factors to Consider

When you’re weighing a possible rollover from your company retirement account into an IRA, there are several things to think about first.
May 16, 2022