WASHINGTON — After declining steadily from record highs last summer, gas prices are on the rise again and could pose a new threat to the economy.
Costs to fill up in Massachusetts and nationwide are the highest since November, in part because extreme heat has slowed production at refineries in Texas and Louisiana. The average price of a gallon of regular gas in the state was up 11 cents over the past week alone to $3.73 on Thursday, according to AAA. The price was even higher nationally: $3.82, a jump of 28 cents in the past month.
Although still much lower than a year ago, prices are climbing at a time in the summer driving season when they usually would be falling, adding to the costs of hitting the road for vacation. Analysts said prices are likely to keep climbing into the fall as demand increases with stronger US economic growth and supply is constrained by cuts in oil production by Saudi Arabia and other nations.
“If you add up what’s going on with refineries and heat, and the price of oil led by Saudi Arabia, Russia, and OPEC, it’s not adding up to a pretty picture,” said Patrick De Haan, head of petroleum analysis for price-tracking firm GasBuddy. “The trend isn’t looking great.”
Prices usually decline further in September as summer vacations end and refiners switch to less expensive winter gas blends, he said. But the effects of this summer’s soaring temperatures could continue into the fall. Water temperatures in the Atlantic and Gulf of Mexico are at record highs, raising concerns that a more active hurricane season could reduce US oil and gas production in the coming months.
“Nothing gives me more of a nightmare than a Category 5 hurricane blowing through the Gulf and wiping out refining capacity in Texas or Louisiana,” said Mark Zandi, chief economist at Moody’s Analytics, an economics research and consulting firm. He said that if gas prices increase to more than $4 a gallon, he would get “really uncomfortable” about the potential to trigger a recession.
Falling gas prices over the past year have been a major factor in lowering overall inflation and improving consumer confidence, which has led to growing optimism the country could avoid a long-feared recession.
Driven in large part by global supply disruptions after Russia’s invasion of Ukraine, average gas prices hit a record $5.05 in Massachusetts and $5.02 nationally in June 2022, according to AAA. That helped push the annual consumer price index to a four-decade high of 9.1 percent that month. A year later, inflation was running at 3 percent, much closer to normal, after aggressive interest rate hikes by the Federal Reserve.
A continued increase in gas prices could cause inflation to start rising again. That probably would trigger higher interest rates from the Fed and raise the risk of a recession, Zandi said.
President Biden has hit the road in recent weeks in what amounts to a victory lap touting the decline in inflation as a sign that his policies, dubbed Bidenomics, are working.
“While there is more work ahead . . . The Washington Post suggested Republicans may have to find something else to criticize me for now that inflation is coming down,” Biden said in a speech in Auburn, Maine, last week. “Maybe they’ll decide to impeach me because it’s coming down.”
A return to rising inflation would throw a wrench in that message — a key pillar of the president’s reelection campaign. The White House is closely monitoring gas prices, as it always does given their importance to the economy, said an administration official, who spoke on the condition of anonymity to discuss the issue.
Higher gas prices fuel broader inflation because of increased transportation costs for products. And gas prices also play an outsize role in consumer confidence, Zandi said.
“There’s no more important price than the cost of a gallon of regular unleaded. Almost everyone drives and they see that price almost every single day so it really does affect their thinking very quickly,” he said. “Nothing is more damaging to the collective psyche than higher gas prices, and nothing more soothing than lower prices.”
To help push down prices last year, Biden began releasing oil from the Strategic Petroleum Reserve to add to global supplies and successfully encouraged allies to do the same. The sales ended in December, and the United States began purchasing oil to refill the reserve in May after prices had dropped significantly. While not a major factor, the policy change has added to upward pressure on oil prices, said Andy Lipow, president of Lipow Oil Associates, a Houston-based consulting firm.
“The US Strategic Petroleum Reserve, which had been a supplier of oil to the market . . . now has become a buyer of oil from the market,” Lipow said.
The administration official would not comment on whether the White House plans to continue purchasing oil to refill the reserve, and an Energy Department spokesperson did not respond to an email request for comment.
Administration officials have said they would only buy oil for the reserve if it cost no more than about $72 a barrel, so the higher prices could delay plans to continue refilling it. The Energy Department solicited bids last month for the purchase of 6 million barrels of oil for delivery this fall.
Crude oil prices have risen from about $67 a barrel in June to more than $81 a barrel Thursday. An analyst for Bank of America Global Research forecast last week that crude oil would rise to $90 a barrel by early next year. Stronger economic growth in the United States this spring has boosted demand, while China has announced plans for an economic stimulus plan that would add to upward price pressures.
US oil production is up this year and expected to set a record, according to the US Energy Information Administration. But that increased supply has been offset by production cuts from Saudi Arabia and other nations, including Russia, in what’s known as OPEC+, as they try to push up the price of oil to increase their profits.
Saudi Arabia on Thursday announced it would voluntarily extend its production cut of 1 million barrels a day through September. Additional production cuts could be announced after an OPEC+ meeting on Friday.
Zandi said $90 a barrel of oil wouldn’t be high enough to tip the United States into a recession, but would be approaching a danger zone for the economy.
“It’s very difficult to forecast oil prices given all the moving parts,” he said. “You’ve got the Chinese demand, Russian oil and sanctions, what OPEC decides to do or not do, and if another geopolitical event disrupts supply somewhere,” he said. “That just makes it that much more nerve-wracking.”
It all adds up to a lot of uncertainty for Americans about how much they’ll be paying at the pump in the coming months, De Haan said.
“There’s a lot of different ways this could go,” he said. “But I don’t for now at least see a whole lot of great news for motorists.”