A Long Way to Go for Oil Rigs to Limit Gas Prices

With gas prices increasing from around $2.30 a gallon to $2.94 in just a few short months, you might be wondering how economists keep saying that inflation is still low. Perhaps these guys don’t drive to work – or maybe they all drive Teslas? Either way, the fact is that gasoline prices are increasing and despite the fat stimulus checks that went out to everyone, those checks are likely to be less helpful if we have to pay more for gas. It doesn’t help that consumers are now driving more – whether to go on a much needed vacation or simply to get back to the office for some ‘more’ productive work.

The price of oil is typically driven by supply/demand imbalances. When supply declines, prices go up unless demand also declines enough to keep the price in equilibriium. Initially, when supply decreased,  demand didn’t decline enough to limit the increase in price – even during the pandemic.  

And now that demand is picking up steam, it’s yet another driver of oil and gas price increases = especially as we get into the summer driving months One factor that could eventually stop the rise in oil and gas prices is an increase in the number of oil rigs in production in the US. When oil prices are high, more oil rigs come online to take advantage of the higher prices. Most of them are rigs that aren’t profitable at lower oil prices so once prices reach a certain level, these rigs are put to work.

The last time oil prices were above $65 a barrel, there were over 800 oil rigs in operation. Today, there are barely 300 rigs in production. That means it could take a while before oil rig production is anywhere near their prior peak in 2018, which means that if demand continues to rise as expected, so will gas prices.

So, have you ordered your Tesla yet?

Gas Prices