Why is gasoline so expensive and when will prices go down?

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It is a recurring question, in Europe and all around the world, and it has become overwhelming in recent days, after the prices skyrocketed between February and March 2022. And given some alarmism going on among the newspapers lately, we have to ask ourselves what must happen for the price of fuel to start falling. Let’s see the possibilities.

Why Are Prices Going Up?
Why Are Prices Going Up?

Why is fuel so expensive?

The reason for the increases at the beginning of 2022 lies above all in the international tensions resulting from the conflict between Russia and Ukraine. Most of western countries imports oil from Russia in substantial quantities, and the invasion of Ukraine immediately caused gasoline prices to skyrocket. The reason for the high price, however, does not lie in a present supply difficulty: the supply of gas and oil up to now is stable (otherwise the prices would be much higher), and the economic sanctions active up to now have excluded any impact on these products.

So why has the price gone up so much anyway? Basically for a natural market law: if the situation linked to the supply is unstable, does not give confidence and does not offer guarantees for the near future, the markets anticipate possible difficulties to come and therefore the price of raw materials (oil and gas) increases immediately. Not because the supply difficulties are already underway, but because they could arrive soon.

How and when will the fuel price go down?

There are two quick ways to bring down the price of gasoline. One is to act on excise duty rates and VAT, both tools available to the government of any country, and the other is to operate on the price of raw oil.

As for the market price of oil, the possibility is clear: the moment we start talking about serious peace negotiations, within the conflict between Russia and Ukraine, the price will drop immediately. It will not even be necessary to wait weeks, because the recent hikes have just been an anticipation of future concerns, and if that concern turns out to be unfounded, prices would drop immediately.

On excise duties and VAT, on the other hand, it would need the commitment of the state. As an emergency intervention, possibly, with the awareness that reducing excise duty rates and VAT would affect the economic budget.

Therefore, in order for the price of gasoline to return to the levels of a few months ago, it will be necessary to wait for a resolution of the conflict between Russia and Ukraine or for an extraordinary intervention by the governments. At that point, prices may return to what we saw a few months ago. And any further reduction would be part of the normal negotiations between consumer continents and oil-producing countries.