The American Automobile Association says fuel prices are the highest they've been since 2014. “Compared to an average of the last three Memorial Day weekends, pump prices are nearly 50 cents more expensive and climbing,” AAA spokeswoman Jeanette Casselano said in a statement. “Trends are indicating that this summer is likely to bring the national average to at least $3 per gallon.”
While the issue is already becoming a political football, it would seem pulling out of the Iran deal only plays a small part in the rise. Iran isn’t really crucial now, according USA Today’s Ken Fisher. It produces about 4.5 million barrels of oil a day, exporting just 2.5 million barrels. U.S. crude production is now 10.5 million barrels a day and should reach 11.9 million barrels next year. Also, much of Iran's fuel goes to China anyway.
According to American Transportation Research Institute (ATRI), fuel prices have fluctuated dramatically over the past decade. U.S. diesel prices peaked at almost $4.80 per gallon in the summer of 2008 before a precipitous fall to roughly $2.00 per gallon by March of the following year. As the economy recovered from the Great Recession, diesel prices started to pick up again, growing through 2010 before stabilizing in the $3.75-$4.15 range between 2011 and mid-2014. At that time, the emergence of U.S. shale oil induced a global supply glut that resulted in plummeting diesel prices for the next two years until reaching a bottom price of $1.98 in February 2016. At the time of this publishing diesel fuel was $2.79 per gallon--up slightly due to the impacts of Hurricane Harvey in Texas.
To a large extent, the rise in fuel prices has to do with the same factors playing into the capacity crunch of 2018. AAA suggests that a strong economy and growing consumer confidence are the primary drivers behind the growth in travel and consumption even in the face of increasing fuel.
According to SONAR data, the real-time national average for diesel truck stop actual price per gallon is $3.15, and as the graph below shows, May has seen a considerable rise in prices all month long. Today’s figure, however, actually remains slightly below the 10-year average of $3.31 per gallon, according to ATRI’s report that ranged from 2008-2016.
Demand probably isn't strong enough to justify a continual spike in prices. That's where crude oil comes into play. Brent crude, the global benchmark that tends to influence U.S. gas prices, recently topped $80 a barrel. It's up about 50 percent over the past year. The oil rally has been driven by a range of factors, including robust demand around the world amid strong economic growth.
The rebound in oil prices from the crash of 2015-2016 was engineered in large part by OPEC. The oil cartel teamed up with Russia to slash production beginning in early 2017 in a bid to fix a supply glut. That strategy eventually worked and global oil stockpiles, especially in the United States, have declined steadily.
In fact, OPEC and Russia's moves have been strong enough to offset soaring production from the shale revolution in the U.S. That’s why the current highs will probably not escalate further. Places like West Texas are producing so much oil they can barely find enough drivers, which is partly constraining supply—but the operations of which continue to get so much better that even oil’s production margins are high. According to Fisher, some oil fields are now profitable below $40 a barrel. Pumping at today’s $70 price produces premium profits.
Gas prices aren’t as variable as oil, however, so it's not likely that prices will fall back to $2 per gallon anytime soon. Depending on the state, taxes are between 10.7 percent (Alabama) and 25.5 percent (Pennsylvania) of the per gallon price of regular gas. The average is about 16 percent, or 53.7 cents a gallon. Those taxes remain stable despite oil’s peaks and troughs.
If prices become a real problem, Trump could also eventually take action. Goldman Sachs recently suggested Trump could tap the emergency stockpile of oil stored in the Strategic Petroleum Reserve to make up for any geopolitical production losses.
It's also possible that OPEC and Russia, sensing that prices have gotten too hot, step in to calm the market down. In fact, Saudi Arabia said this week that OPEC and Russia could supply more oil to world markets "in the near future."
That news, from a panel discussion hosted by CNNMoney's John Defterios, helped send U.S. oil prices plunging 4 percent to $67.88 a barrel. It was oil's steepest decline in nearly a year. OPEC and Russia are due to meet in Vienna on June 22.
On the other hand, some analysts are skeptical that OPEC and Russia will do anything to spoil the high prices needed to balance their budgets.
"The Saudis are quite enjoying $80 prices," said Michael Tran, global energy strategist at RBC Capital Markets. "I'm not sure they're going to rush back in and flood the market with barrels," he said.
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