EXPLAINED: Here’s why gas prices and inflation are so high in the U.S.

Nationally recognized economist gives insight into how it happened and what to expect

Gas prices hit a new record

With gas prices soaring yet again in Florida, one expert has stated that residents of the state shouldn’t expect relief anytime soon.

Sean Snaith, director of University of Central Florida’s Institute for Economic Forecasting, told News 6 in an interview that the spike in gas prices began alongside general inflation — all the way back in 2020 during the COVID-19 pandemic.

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Snaith said that at first, the prices for oil and gas actually went down, as people were stuck in their homes due to lockdown policies.

“When we shut down the economy or large portions of the economy, and we shut down schools, and we have stay-at-home orders around much of the country...the demand for oil and gasoline collapsed,” Snaith said. “And so, prices plummeted. In fact, at one point, the price of oil in March actually went negative.”

Snaith commented that the prolonged lockdowns kept oil and gas companies from investing in more production.

“Prices remained very suppressed, and so oil producers really had no incentive to keep rigs running or invest in new wells or make that kind of expenditure when they were having so much problems selling their oil because (of) the lockdowns,” he said. “Two weeks to flatten the curve became two months that bulldozed the economy.”

However, after lockdown policies began to ease up, Snaith said demand began to bounce back — not just in the gas market but in others, as well.

“When we came to our senses and started opening the economy back up, there was just — not just for gasoline and oil but for a variety of goods and services — just an explosion of demand,” he said.

Snaith explained that when there’s more demand in a market, it means consumers are willing to pay more, which in turn drives up prices.

He added that government spending also contributed to this shift in demand by increasing the amount of money in the economy.

“The federal government, the Cares Act and subsequent spending bills, including more recent infrastructure spending bills, pumped $6 trillion into an economy that is already roaring back to life just by virtue of the fact that it was allowed to reopen,” he said. “And so this just added to that demand.”

While other causes, such as the Russian invasion of Ukraine, have also had effects on the market, Snaith said they didn’t contribute much to the current gas crisis.

“The rise in oil and gas in the crisis was underway for almost a year and a half before Putin invaded,” Snaith stated. “I think we’re always — especially politically — looking for someone to use as a scapegoat or somebody to point out.”

Snaith said the invasion did “cause a spike” due to uncertainty, as markets didn’t know whether the military action might spread, but the spike has since faded away.

Instead, he said the prices seen at the pump nowadays can still be attributed to ongoing inflation — worsened by federal environmental policies.

“To push this Green New Deal-type policy, I think has hurt in the sense that there’s a hesitancy in the oil (and) natural gas industry to drill new wells or to restart rigs, particularly in shale oil areas where these are typically smaller, independent drillers that are putting in the wells here,” he said.

According to Snaith, many of these producers are reluctant to invest in production due to federal holds and cancellations on leasing for oil and gas.

“To drill a new well in those shale fields is $8 million or so, and these companies are hesitant to make that kind of investment when the next executive order could restrict the use of shale oil and shale gas,” he said.

And while gas companies are typically quick to pounce when it comes to high prices at the pump, Snaith said, the market is showing that companies aren’t producing nearly as much gas as would otherwise be expected.

“Historically, with prices that are $110, $113 a barrel, oil companies couldn’t pump fast enough to get that to the market because that’s incredibly high-priced,” he explained. “But we’re just not seeing the rig count in this country respond to these higher prices.”

Snaith went on to say that he doesn’t foresee prices going back down anytime soon. He said he believes there are two ways to reduce the inflation in gas prices — changing policies or a recession.

“Unfortunately, I think high prices are going to be persistent because we’re not seeing a response in production to higher prices. As I said, I don’t think this administration is going to back away from these policies, so it may take changing administrations,” he said. “I think the one thing that could result in prices coming down a little bit — that seems to be an increasing possibility — is a recession in the economy. That would reduce demand for oil and gasoline prices and, that way, lead to lower prices.”

Snaith pointed to recent interest rate hikes by the Federal Reserve as evidence that a recession may be in the near future.

“(The Federal Reserve) is starting the process now of raising interest rates and shrinking their balance sheet to pull back on the economy and to bring inflation to a heel. And I think in the process of trying to do that, it’s likely to nudge the economy into a recession over the next year.”

A bill passed by the U.S. House of Representatives last month, titled the “Consumer Fuel Price Gouging Prevention Act,” could prevent producers from selling gasoline at an “unconscionably excessive” price, according to the bill.

If the bill passes through the Senate, it could give the president the power to enact price limits on gasoline sales in the country in an attempt to prevent “exploitation” of an emergency.

In a statement regarding the bill to News 6, Snaith wrote, “This bill would bring about a return to the rationing/long gasoline lines of the 1970s. A horrible idea.”

News 6 has attached the text of the bill below.

About the Author:

Anthony, a graduate of the University of Florida, joined ClickOrlando.com in April 2022.