Increased gas prices demonstrate continual volatility of economy, politics

By Jose Bolivar, Contributing Writer

Oil, or petroleum, is often nicknamed “black gold” for its critical value in society. It can be refined into various forms of fuel, like gasoline or diesel, which power modern machinery. Oil remains a staple in the lives of many in the United States due to its role in the economy; the modern infrastructure of the US relies on oil to run.

Recently, the price of gasoline has increased significantly, causing great concern throughout the country. This rise in gas prices rests upon complex processes rooted in economics and politics. Since oil is a finite, naturally occurring fossil fuel, it is a highly valuable commodity to countries with access to it, leading to political and economic engagements that can restrict that same access. 

The increase in the price of gas is also tied to an increase in the price of oil, which has been caused by a few distinct factors. When viewed as a market commodity, oil is subject to processes of shifting supply and demand.

Don Fullerton, professor in Business, said that generally, there are constant trends of increased industrialization around the globe that drive up demand for oil while depleting an already finite supply. Then, the equilibrium price (the point at which demand and supply meet) gradually increases because the demand curve expands while the supply curve contracts. Although the increase in demand is constant, the decrease in supply is not, leading to a fluctuating price. 

“I love when someone asks me a question like, ‘Will the price increase or decrease?’ because the answer is yes,” Fullerton said. “It will do both.”

Though the global supply of oil is being depleted in the long-run, in the short-run, it moves up and down due to various surprise factors like wars or economic and political situations or new extraction technologies. The volatility of the oil supply leads to the equilibrium price fluctuating either to meet demand or to lag behind it. 

For prices to have increased so suddenly and sharply as they have this year, multiple surprise factors had to occur. 

“There are transient political factors, seasonal factors and some long-term trends,” said George Deltas, Department Head of Economics, in an email.  

The political factors are rooted in unfavorable engagements with oil-producing countries. In fact, the war in Ukraine is a major catalyst for the situation; given how oil is a major Russian export, the sanctions imposed on Russia have cut off access to a significant supply of oil.

“The transient political factors consist of the disruption in the global oil market following the sanctions imposed on Russia for its invasion of Ukraine coupled with the unwillingness of some key Middle Eastern OPEC producers to increase their output,” Deltas said in an email, OPEC standing for Organization of Petroleum Exporting Countries.

Another political factor lies in efforts to avoid severe impacts from the sanctions by negotiating with OPEC producers. However, some of these producers have not been willing or able to increase output to meet demands. 

This web of political and economic factors coincides with two additional, trend-related factors. One of these is a seasonal factor related to a yearly-occurring trend, and one is a long-term factor related to oil production investments.

“The seasonal factor is simply the tendency of gasoline prices to increase in the summer because of the vacation-induced demand in North America and Europe,” Deltas said. “The long-term trend is more subtle.”

Deltas explained the logistics of the long-term trend, clarifying the change of oil producers’ actions from the past to the current state of affairs.

“In the past, oil producers would respond to high oil prices by ramping up development of oil fields,” Deltas said. “Over time, this would help bring prices down. Nowadays, oil producers appear reluctant to invest heavily in new fields, especially those with large up-front costs. This is possibly out of fear that climate change concerns will eventually reduce oil demand and prices, and they will not be able to recoup the initial investment.” 

The increase in prices that was gradually taking place from trends was sharply accelerated by the political factors that took shape. The outcome of this situation could take various routes. 

Deltas claimed that the situation is very likely to stabilize. The transient political and seasonal factors mentioned earlier are, by definition, not permanent. The summer peak season is on its way out, which should stabilize prices, and though the war in Ukraine will not likely end anytime soon, there are ongoing diplomatic talks with OPEC countries to get them to help with oil production, which will likely stabilize the price.

Fullerton brought up the further uncertainty of surprise factors.

“We cannot anticipate surprises,” Fullerton said. “We don’t know whether the next surprise will make prices go higher because of another war or lower because a whole new oil reserve is discovered somewhere in the world.”

Fullerton added that if the war ends soon, or if sanctions are lifted, or if some agreement is reached with OPEC producers, the price should fall again and return to relative normalcy. He noted that there is a chance that the situation could worsen, but this would depend on the war itself worsening and especially if sanctions continue or if an embargo is placed on Russia.

While the situation develops into one of the possible outcomes, there are ways that one can navigate through it and prepare for any other similar scenarios.

Fullerton recommended looking into owning an electric vehicle, especially given how the price of oil is expected to steadily increase over time. He added that if the use of electric or hybrid vehicles increases enough, it would drive the demand and, therefore, the price of gas down. 

According to Fullerton, some long-term remedy will have to come from adoption of electric vehicles, political agreements or economic deals with other oil producers. Regarding the short term, Fullerton emphasized that one should “prepare for possible short-run jumps upward” because they often happen without warning. 

Furthermore, Fullerton noted that students will not be too heavily impacted by rising gas prices because their lifestyle generally requires minimal driving. He explained that those who will be most impacted are people who live in more car-dependent areas like suburbs, which many students come from. Many citizens of Urbana-Champaign are dependent on cars as well, so they are liable to be impacted in the same way.

For University students, Fullerton suggested living closer to campus in an apartment within walking distance of stores and school, using a bike, getting an electric or hybrid vehicle, carpooling or utilizing public transport. 

Public transportation in Champaign-Urbana remains a popular option for students to travel around campus due to its availability and accessibility for students. The buses in Urbana-Champaign are designed to be fuel-efficient and sustainable, making them reliable and resilient during fuel-related economic situations.

Amy Snyder, MTD Chief of Staff, said that buses have not been very affected by the rise in gas prices because they run on diesel fuel, which is cheaper, and because most buses are hybrid. 

“Ninety-eight percent are hybrid and use batteries that are powered by a regenerative braking system, which results in a thirty to forty-five percent reduction of fuel consumption,” Snyder said.

There are 114 buses, four that run completely on diesel and will be retired by the end of the year and two hydrogen fuel cell electric buses powered by hydrogen that is made on site by solar power. The rest are hybrid, using a combination of diesel and regenerative braking.

Snyder added that buses are not very fast, averaging about 11 to 20 miles per hour, which means they don’t use a whole lot of fuel. 

The main problem to watch out for regarding buses is a workforce shortage. MTD is still recovering from the pandemic’s effects on the available workforce, so there are not enough bus operators to run at full capacity. Snyder said that there is “twenty percent less service and less frequencies on some routes.” 

The routes that will be affected in the coming school year are 22/220 Illini, 12 Teal Daytime, 13/130 Silver and 10 Gold, which will see less frequency. As advice to those interested in using public transport more often, Snyder said to plan fresh trips (meaning trips that aren’t planned from memory of routes in past years), use updated GPS real-time information available on the MTD app and website and sign up for an account on MTD, which allows users to get real-time updates.

Deltas emphasized that the situation taking place now with gas prices is nothing new and will inevitably be over soon and that there will be a return to some level of normalcy.

“If you go back to 1979 and 1980, the price per gallon is lower, but if you adjust the price for the purchasing power of the dollar, the price is not much higher than it was before,” Deltas said. “It’s an unpleasant experience, but the prices will go down; it doesn’t last very long. This will pass sooner than people think so we shouldn’t overreact.”  

Although the situation will pass, it is still part of the ongoing long-term trend of lessening supply and increasing demand, and it provides an insight into the effects of short-term surprise situations, which are liable to recur. 

“The general trend that people should expect in the long term is increase in the price of gasoline,” Fullerton said. “They shouldn’t be surprised if, in the long run, the price goes up to six or seven dollars a gallon.” 

 

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