The fundamentals of fuel prices and supply

I’ve been asked a lot of questions by my family, friends and neighbors in recent days. If you’re reading this, you may have questions too. So here are a few examples of how I’ve responded based on my understanding of the global energy system and my 30-year career in the industry.

Why are gas prices rising?

Let’s first talk about oil and gas fundamentals.

Crude oil is a globally traded commodity and the largest source of energy around the world. The price for oil is set by buyers and sellers reacting to the principle of supply and demand. The price is higher when demand exceeds supply and lower when there is more supply available than demand.

Gasoline and other fuels, such as diesel and jet fuel, are made from oil through the refining process. Oil is the largest factor in fuel price, but the price of fuel is also determined by supply and demand.

When supply and demand are out of sync – causing either high or low prices – we say the market is unbalanced. The seeds of the current imbalance were largely planted in the global pandemic, which dramatically reduced demand for gasoline and diesel as the world stopped traveling and reduced shipments of goods.

The impact was devastating across industries – including oil and gas, with some refineries going out of business. In fact, ExxonMobil lost $22 billion in 2020. As a result, there was less money across the industry to invest in finding and developing oil and gas.

Just as demand recovered post-pandemic, supply was further impacted by the Ukraine invasion and resulting restrictions on Russian oil supply.

Why can’t supply be increased?

The simple answer is it can. But it takes time.

Finding, developing and producing new supplies of oil takes many years and costs billions of dollars. That oil then needs to be processed at a refinery. Today, most U.S. refineries are running at or near full capacity, processing all the oil they can possibly handle. However, refining capacity has contracted in recent years due to the pandemic, government policies or other economic pressures.

The good news is that some companies, including ExxonMobil, are investing in new refining capacity. But there are challenges in doing so – including inconsistent returns due to price volatility, regulatory requirements and opposition to oil and gas infrastructure.

Where does ExxonMobil fit in? 

Maximum output: Our workforce is working around the clock at our U.S. Gulf Coast refineries – as well as others we operate in Europe and Asia – to process as much oil into fuels as practically possible to help meet demand. And our refineries lead the industry in lower-carbon-emissions intensity, performing 15% better than the global industry average. 

Continued investment: In recent years, we continued investing in new supplies of oil, natural gas and petroleum products to be ready for post-pandemic demand. We’re increasing production at an industry-leading pace offshore Guyana and plan to increase production in the Permian Basin in West Texas and New Mexico by 25% this year over last year. That’s on top of a 70% production increase between 2019 and 2021. To turn that oil into gasoline and diesel, we’re increasing our processing capacity by about 250,000 barrels per day – which is the equivalent of adding a new medium-sized refinery. 

What more can be done? 

To ensure stable prices over the long term, governments can promote new investment through clear and consistent policy that supports resource development and infrastructure, such as pipelines. In the short term, the government could enact critical measures often used in emergencies following hurricanes or other supply disruptions, such as a waiver to the Jones Act, to make it easier to move oil and petroleum products. Other emergency response waivers could be granted to relax fuel specifications to help increase supplies.

For nearly 140 years, ExxonMobil has supplied products that help people live healthy, prosperous lives and thrive in an ever-changing world. We’re committed to continuing to do our part.