The surge in gasoline prices is impossible to miss and at the top of consumers' minds as large billboards announce that gas now costs $4, or $5, and even above $6 a gallon in some places.
Americans are feeling the impact of record high prices at the pump. Consumers have less spending money because of higher fuel prices. Diesel is the most expensive fuel and it means that anything transported on a truck, train or ship is affected.
Energy costs are a major contributor to the decades-high inflation numbers showing up as prices for all manner of goods and services march higher.
Bob McNally, president at Rapidan Energy Group, said on CNBC that energy is the tail wagging the dog.
Diesel is the economic fuel. It's embedded in economic activity and it filters through so many goods and services.
The increase in gasoline prices is due to the increase in oil prices. Russia's invasion of Ukraine is pushing crude higher, but prices were already moving ahead of the war. Even before Covid, energy producers cut back on investment and less profitable projects under pressure from low prices and institutional shareholders.
When the need for petroleum products fell off a cliff, producers slashed output further. Less fuel was needed because people weren't going anywhere and businesses weren't open. Demand dropped so suddenly that West Texas Intermediate crude briefly traded in negative territory. An increasingly tight oil market began last fall. In November, President Joe Biden tapped the Strategic Petroleum Reserve in a coordinated effort with other nations, including India and Japan, in an effort to calm prices. The relief was short lived.
Russia's invasion of Ukraine at the end of February sent the energy market reeling.
On March 7, the price of U.S. oil shot to the highest level since 2008. The European Union relies on Russia for natural gas, which is the largest oil and products exporter in the world. The European Union banned Russian oil imports after the invasion, but it had detrimental consequences.
Hungary is among those pushing back against the EU's attempt to impose a sixth round of sanctions against Russia.
Oil has retreated from its post-invasion highs, but is still above $100. This time last year, the price of a barrel of crude was closer to $63, but at the beginning of the year, it was $75.
The rapid rise in oil and fuel costs is causing headaches for the Biden administration, which has called on producers to pump more. On the other hand, oil companies are hesitant to drill because of capital discipline. Executives say that even if they wanted to pump more, they can. They are facing the same issues that are playing out across the economy, including labor shortages and rising prices of parts and raw materials.
Oil prices make up half of the cost of a gallon of gasoline, but they are not the only factor. Taxes, distribution and refining costs can affect prices.
It is beginning to play a bigger role. The key step in turning crude oil into products is refining. In the northeast, how many barrels of oil can be processed has fallen.
Europe is looking for alternate suppliers because of sanctions against Russia. The cost of oil and the price at which they sell their products are now at record levels.
Gas prices are going up because of these. The national average for a gallon of gas hit a record on Thursday, hitting a high of $4.589, up from $3.043 at this time last year. The numbers are not adjusted for inflation.
California's statewide average is now above $6 per gallon, which is the first time in history that every state has averaged more than $4 per gallon.
Diesel prices are going up. Diesel prices hit an all-time high of $5.577 a gallon on Wednesday, up 76% over the past year.
According to Yardeni Research, households are shelling out $5,000 per year on gasoline, up from $2,800 a year ago.
Demand destruction from higher gas prices might not have set in yet, but the impacts of surging fuel costs are rippling throughout the economy. Consumers will spend less money in their pocket because of higher prices at the pump. Expansion of costs for companies is one of the things that will be passed along to consumers.
Target is facing higher costs. Target's earnings results caused the store chain's shares to plunge 25% on Wednesday, the single worst day since 1987.
We didn't anticipate the rapid shifts we have seen over the last 60 days. Target CEO Brian Cornell said on the company's quarterly earnings call that they did not anticipate that transportation and freight costs would go up as fuel prices went up.
He told CNBC that Target didn't anticipate a significant increase in fuel and diesel costs.
Walmart president and CEO Doug McMillon said Tuesday that costs accelerated during the quarter faster than they were able to pass them through.
Over the last year, domestic and import freight costs have increased substantially, and Tractor Supply executives expect those trends to continue.
The cost to ship an overseas container has more than doubled compared to pre-pandemic rates, and the cost of fuel is approximately one and a half times higher than it was a year ago.
Monster beverage executives said the company experienced significant increases in the cost of sales compared to the first quarter of the year due to increased freight rates and fuel costs.
The airline industry is feeling the impact of the surge in jet fuel prices.
Southwest Air noted that it saw a significant rise in market jet fuel prices over the last quarter, while United CEO Scott Kirby told CNBC that if today's jet fuel prices hold it will cost the airline $10 billion more than in.
The challenge that sits in front of us, however, is the rising and record cost of diesel fuel which has a huge impact on overall freight pricing, according to Bob Biesterfeld, CEO at C.H. Robinson.
He said that a carrier will have to pay more for fuel to move a shipment from Los Angeles to the East Coast.
He said that it was a real pressure on inflationary costs.
Experts say that demand destruction, the level at which high prices influence consumer behavior, could be the only way to quell rising gasoline.
John Kilduff, partner at Again Capital, said a $5 national average is in the cards for the busy driving season between Memorial Day weekend and the Fourth of July.
He said on CNBC that the national average needs to go higher.
Kilduff said that a strong labor market and a surge in demand after the H1N1 swine flu made people pay what they have to to get to their job.
Andy Lipow, president of Lipow Oil ASSOCIATES, thinks the national average will peak at between $4.60 and $4.65.
The sell-off in stocks could lead to a reprieve for consumers at the pump.
If oil stays high, costs across the economy could remain elevated even if gas prices are temporarily reduced.
It will take a recession to rein in product inflation. He said that gas prices will go higher until there is a sign of real demand capitulation.
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