Oil prices are surging due to concerns about what will happen to global supplies as Russia's invasion of Ukraine proceeds. "This could be the worst crisis since the Arab oil embargo and the Iranian revolution in the 1970s," warned oil analyst and historian Daniel Yergin on CNBC. In the wake of the 1973 oil embargo, the global price of oil quadrupled.
The current price of benchmark West Texas Intermediate (WTI) oil hovers around $112 per barrel, up from $66 a year ago. Some analysts are warning that the price of a barrel of oil will reach as high as $185 soon. The global inflation-adjusted price of crude last reached similar heady heights in June 2008.
"The one-month oil supply elasticity is close to zero," concluded Federal Reserve Bank of Dallas researcher Lutz Kilian in a 2020 working paper. In simpler terms, in the short-run when the price of oil increases, its supply does not. This is because it takes a while to drill more wells, build more pipelines, and redirect shipments. So expect filling your tank to get more expensive in the coming months. In fact, the current average price for a gallon of regular gasoline is $3.84, up from $2.71 last March. In July 2008, the average price of a gallon of regular gasoline peaked at $4.06 (inflation-adjusted $5.19).
Russia pumps about 10 percent of the world's daily supply of crude oil, and its war with Ukraine is already disrupting exports of its crude. Barron's cites J.P. Morgan commodities strategist Natasha Kaneva's observation that about 70 percent of Russian oil can't find a buyer. "While the US and its allies have so far stopped short of imposing penalties directly on Russian oil and gas, on Tuesday it became increasingly clear that Russian oil is being ostracized," she wrote.
Bad as gas prices may get, we have likely seen and survived worse.
As inflation took off at the beginning of the 1970s, President Richard Nixon's administration imposed price controls, including on oil and gasoline. In reaction to the 1973 oil "crisis," the Nixon Administration further ramped up price controls on oil and gasoline (as well as promulgated corporate average fuel economy standards and imposed a 55 mph speed limit). This led to the predictable result of widespread gasoline shortages because if petroleum companies can't make a profit, they simply stop drilling for, or importing, oil.
To address government-created gasoline shortages, the Nixon administration next resorted to rationing. "Shortages in 1974 led to a nationwide odd-even rationing program," noted MIT economist Christopher Knittel in 2014. "Vehicles with license plates ending in an odd number could purchase gas on odd days; those with even-numbered license plates could purchase fuel on even days. To even out access, everyone could purchase gasoline on the 31st."
Various price controls on U.S. domestic oil production remained until President Ronald Reagan abolished them nine days after he was inaugurated in 1981. The price of oil almost immediately began to drift downward.
What should we expect in 2022?
Over the past year, the price of oil has been increasing as the world's economies begin to recover from the COVID-19 pandemic's disruptions. In response to rising prices at the pump, President Joe Biden reprised in November a bit of political theater from his earlier stint in the Obama administration by asking the Federal Trade Commission (FTC) to investigate the oil companies for "anti-competitive or otherwise potentially illegal conduct." The FTC's 2011 report, in response to the Obama administration's demand for an investigation, concluded that "crude oil prices continue to be the main driver of gasoline prices. Crude oil prices since 2005 have changed due to shifts in both world-wide demand and supply."
That's what's happening to oil prices now, exacerbated by the additional wildcard of a war in Eastern Europe. The good news is that so far, the Biden administration has not made any moves toward mimicking Nixon's economically ruinous price control blunders.
Keep in mind U.S. foreign service officer James Akins' 1973 observation: "Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah."
As painful as it is, prices at the pump in the short term are going to increase. But that's a helluva lot better than gas rationing.