March 11, 2022

The impact of the soaring gas oil prices on the transportation industry and the US economy

The impact of the soaring gas oil prices on the transportation industry and the US economy

Unless you have been living under a rock for the last two weeks, you probably are well aware by now of the rocketing gas prices across the US as a result of the Russian aggression on Ukraine. This concerning situation begs the question how high will the fuel prices rise and what will the impact of soaring gas prices be on the transportation industry and the wider US economy?

On February 24 Russia’s despot Vladimir Putin started an unprovoked and illegal aggression on its neighboring, sovereign, and independent state Ukraine. Almost immediately across the US, Americans started feeling the financial pain and the cost of this war at the gas pumps. Gas prices are hitting historical record highs, with the average price per gallon rising to $4.83 and already exceeding $5 in some states. So how come the war in Ukraine is affecting gas prices in America? The root of the problem started back during the COVID-19 pandemic, with Russia’s war in Ukraine exacerbating this rise in the cost of fuel as the supply and demand equilibrium has changed.

Post pandemic demand for gas spiked after previously plummeting in March of 2020, as millions of Americans isolated at home due to national wide lockdowns, with typical drivers cutting their time behind the wheel in half, according to AAA. This decline in gasoline demand caused gas prices to plunge to an average of $1.94 per gallon in April of 2020. But as the vaccine rolled out and the economy recovered, millions of Americans feeling safe again resumed their normal routine, working, traveling, shopping, and thus driving again. This sudden rising demand caused a steady creep in the gas prices, with the average price per gallon reaching $2.82 by March 2021, a 45% increase from the pandemic low. All of this happened in parallel to cuts in oil production, as the OPEC and oil-producing nations such as Russia slashed its output by unprecedented 10 million barrels. To put that into perspective, that represents over a tenth of the global supply. Yet as the global economy recovered from the pandemic, OPEC was slow to resume production and started increasing its output only by July of 2021, by which time they were already late and severely behind the demand curve.
This fuel and general price inflation dynamic were exacerbated by Russia’s war in Ukraine, which caused a rapid spike in gas prices. The US president announced America’s ban on Russian oil and gas imports on Tuesday, targeting Russia’s main revenue source amid the conflict escalation. Although the US imports less than 10% of its oil and gas from Russia, the surge in gas prices is due to the larger global oil market relationships. Given the interconnectedness of the global markets, the US sanctions affects Russia’s ability to export, making it difficult for Russian oil to flow to the global markets, and the fuel quotation prices reacting as a result of that.

Certainly, one of the most affected industries of the economy as a result of these rocketing fuel prices is the transportation industry. Given its primordial role in the US economy, increased costs of transportation will most certainly spill over into further price increases for most consumer, commodity, and industrial goods, reinforcing the inflation surge. With the US average inflation rate having already reached unprecedented historical heights of the last 40 years of almost 8%; and the war in Ukraine continuing without an off-ramp in sight, it is likely that fuel prices will continue to stay high, and further price increases for most goods being expected for the rest of the year. Consequently, it is imperative for transportation firms to increase their efficiency by implementing solutions that might decrease fuel consumption and optimize their operational processes. New transportation equipment with lower fuel consumption, logistical software solutions, as well as optimized freight transportation procedures are just a few of the measures that come to mind.

At AGM Trucking, we do our part, having implemented the measures referenced above during the last years, and continuing to analyze ways in which we can become more efficient by catering to our customers’ dry van transportation needs at the most cost and fuel effective ways.


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