New York (CNN) For Ukraine, the year since the Russian invasion was one of widespread death, destruction and displacement as the lives of millions of people were forever changed. Americans got off easy by comparison, with most feeling the impact of the war only at the gas pump.
But the effect on Americans was much less than across Europe, where energy prices for driving and heating rose much higher. Yet the Americans paid a price for the war and for the sanctions imposed on Russia by the United States and its allies after the invasion.
As Russia is one of the world’s largest oil exporters, the sanctions unrested global energy markets, where oil prices are determined.
Gas prices in the US rose $1.48 per gallon, or 42%, to a record $5.02 between the day before the Russian invasion a year ago and the record price set on June 14.
That spike was short-lived — the national average price of gasoline, as tracked by OPIS for AAA, dropped continuously for 98 consecutive days from when that record was reached in June to Sept. 20. On Friday, the one-year anniversary of the invasion, the national average was $3.39 per gallon, compared to $3.54 the day the war began.
But even with the steady decline since that June record, U.S. motorists spent $528 billion on gasoline last year, up $120 billion from what they’ll spend in 2021, according to OPIS. That works out to about $900 more per U.S. household.
Last year’s total is nearly double the amount spent on gasoline in 2020, as stay-at-home orders and massive job losses in the early months of the pandemic sent gasoline demand plummeting and prices plummeting. Even compared to 2019 before the pandemic, the amount spent on gas last year increased by $156 billion, or an average of $1,200 per household.
Why prices skyrocketed and then fell
A number of factors coincided, causing prices to fall ever since. Now, a year after the start of the war, world crude oil prices and retail normal gas prices in most of the United States are below pre-war levels.
And forecasts suggest they will continue to be so going forward. OPIS expects the average price to be around $3.45 over the course of 2023, up from $3.96 last year. Even some senior forecasts, such as Goldman Sachs’s, estimate an annual average of $3.87 this year.
To understand why they’ve fallen, it’s important to understand why they’ve risen so much and so quickly.
The price of crude oil is determined on the global commodity markets. And to some extent, those markets overreacted to the start of the war.
“The market reaction was driven by uncertainty,” says oil analyst Andy Lipow. He said those trading oil futures believed the world market would have to find a replacement for all Russian oil if no alternative was available.
But Russian oil shipments continued even with the sanctions, although they were diverted elsewhere. Instead of sending much of its oil and refined products to Europe, Russia sent them to countries like China, India and Turkey.
And the sanctions never completely stopped oil shipments to Europe, although a price cap limited shipments and the amount buyers in those countries would be willing to pay.
So the sanctions achieved the goal of reducing the revenue that Russia received from the sale of oil. They also allowed world prices to retreat from their peak in June.
“There was a belief that Russian production would be shrunk, but production is close to what it was a year ago,” said Tom Kloza, global head of energy analysis for OPIS.
In addition, the United States and its allies announced in March that they would begin releasing oil from their crude oil reserves, such as the US Strategic Petroleum Reserve, which would put downward pressure on prices.
The economic outlook also pushed oil prices
Oil is traded globally in US dollars, and the strong dollar that benefited from the Federal Reserve’s historic rate hikes helped limit the effect of the price hikes on US consumers, even as drivers paying in other currencies had to spend much more.
Few things take a bite out of gas prices like a recession, or even the fear of it. People who lose their jobs don’t have to commute and spend less on discretionary things like travel. Consumption falls, followed by prices.
A good example of this occurred during the Great Recession 15 years ago. According to data from OPIS, the average price of a liter of regular gas reached a then all-time high of $4.11 in early July 2008. Six months later, after the collapse of the financial markets and massive job losses, it was down 61% to $1.62.
Growing fears of a global and US recession unrested the markets at the end of 2022, driving the price of oil futures down. Fears of a US recession have eased recently, with very strong reports on US job growth and retail sales, but they have not gone away – especially as the Fed is expected to continue to raise interest rates.
Finally, while many of the restrictions on day-to-day activities that were imposed in the United States and Europe during the pandemic have lifted, the lockdowns in China in late 2022 have negatively impacted global gasoline consumption and hence world prices. China has since reopened, but whether it remains open remains to be seen.
Price below pre-war levels
Towards the end of By November, the national average price for a gallon of regular had fallen below the $3.53 average on February 23, 2022, the day before the invasion. It has remained below that level ever since, even if it is slightly above the post-invasion low of $3.10 a gallon the week around Christmas. This is typically a period with the lowest pump prices of the year.
Of course, the national average may not have much to do with what the stations near you are charging. There is wide variation in prices, with Western states, particularly California, paying much more due to a drop in refining capacity there and stricter environmental regulations.
“It’s easy to say we’re not going to match last year’s prices,” Kloza said. “It could be a year where California pays $6 and Texas pays $2.99.”