The Take: A Recession Could Cool Pump Prices

What's News

The average price of a gallon of regular unleaded gas in the U.S. surpassed $5 on Friday, and the peak is not expected anytime soon as the summer driving season gets into full swing.

Gas prices skyrocketed after Russia's invasion of Ukraine earlier this year, as the U.S. and Europe have pledged to reduce their reliance on Russian oil. Crude oil inventories, which were already tight because of higher demand from economic reopening, were depleted even more, with no sign of relief ahead.

SAP's Take

Higher energy prices did not trigger U.S. inflation, but it added fuel to the fire. The U.S. Consumer Price Index in May rose 8.6%, its highest rate in more than 40 years. Hoping to cool off the economy, the U.S. Federal Reserve is to raise rates by 0.5% this week and could raise incremental hikes by 0.75%.

Such delicate pricing of money and relentless inflation could lead to a recession, as consumers and businesses reduce spending, and that could eventually lead to falling prices at the pump.

"I think prices are really dependent upon both supply and demand" said John Tully, SAP North America senior vice president and managing director of the South Region. "So, obviously, eliminating Russian oil from supply restricts supply and increases price."

Yet there are two factors - supply and demand, and it's the latter that may tame gas prices.

"If there's a recession, demand for energy may decrease," Tully said. "But, when economies begin to grow out of a recession, that will increase the demand for hydrocarbons and prices will go up. So, it is a supply demand question certainly."

If the war in Ukraine ended next month, how fast would the world see relief in gas prices, and would Russia resume its place as Europe's No. 1 source for oil and gas?

"The war has set back Russia with respect to its role in a global economy as a trusted trading partner, specifically with European partners," Tully said. "In my estimation, this war has probably set Russia back a minimum of 30 years, even if it ends tomorrow."

Last week the European Union voted to reduce its dependence on Russian oil, effectively banning about 75% of what it imports.

"They will begin to create alternative sources to Russian oil," Tully said. "That will be hard to replace once they're in place. Now, Russian oil, probably because of proximity, is less expensive. But what's not going to change is the political dynamics between Russia and the European countries, and the lasting impact that this war will have on those relationships."

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Tags: Oil & Gas, The Take