As a record number of Americans hit the streets this upcoming Memorial Day weekend, gasoline prices will be sitting at multi-year highs thanks to an increase in global demand and economic growth, falling fuel inventories, and uncertainty in countries like Venezuela and Iran.

The travel group AAA estimates more than 41.5 million Americans will travel over Memorial Day weekend, the most in more than 12 years and a 5 percent increase over last year. The vast majority of those trips—36.6 million—will be by automobile.

The bump in gas prices does not appear to be dissuading travelers from hitting the road, however. AAA attributes the higher gas prices to “expensive crude oil, record gasoline demand, and shrinking global supply.” But concerns about fuel prices is being offset by hotel, airline, and rental car costs, which the group projects will drop 7 to 14 percent from last Memorial Day.

Crude Oil and Venezuela

The Energy Information Administration (EIA) points to several factors, including falling inventories and “geopolitical risks”—Venezuela and Iran—behind the recent rise in prices at the gasoline pump.

“Crude oil prices have probably been driven higher for three reasons: falling global oil inventories, heightened market perceptions of geopolitical risks, and strong global economic growth signals,” EIA writes.

Those geopolitical risks create uncertainty, and include “the re-imposition of oil sanctions against Iran and the upcoming results of May elections in Venezuela, may materialize into actions that remove oil supplies from the global market and, in turn, tighten global oil balances.”

Venezuela’s election will be held on Sunday, May 20.

Kevin Book, Senior Associate at the Center for Strategic & International Studies in Washington, D.C., told Western Wire via email that Venezuela’s influence on global markets through plummeting production levels is a large component of the rise in prices.

“Since 2017, Venezuela’s collapsing production has taken more crude oil off the market than the deliberate efforts of any other OPEC [Organization of the Petroleum Exporting Countries] player in the Vienna Agreement,” Book wrote. “Sanctions blocking U.S. diluent exports to Venezuela (or barring sales of U.S.-bound Venezuelan crude) seem likely to accelerate the process.”

“By contrast,” Book continued, “Iran sanctions have yet to phase in. Iranian crude keeps flowing—for now—even though the market may be pricing in a reduction in the future.”

Other global market analysts agreed with Venezuela’s predominance, without discounting the possible effects an Iranian drop in production might provide.

“If you ask me what the biggest geopolitical disruption risk to oil supply between now and December, I would say Venezuela,” Bob McNally, President of the Rapidan Energy Group, told Bloomberg. “In terms of geopolitical risk, Iran is just as important. But are we going to lose 400,000 barrels a day of Iranian production by the end of the year? I don’t think so.”

Venezuela’s production is slumping on its own, as daily production has plummeted by about one million barrels per day from 2015, according to Bloomberg. The International Energy Agency estimates the country could see a 70-year low in production, while one former oil minister has declared the state-run company, PDVSA to be nearing collapse.

Rapidan expects Venezuela’s production to drop through the end of 2018.

Michael Cohen of Barclays told Oil and Gas Journal that the Trump administration’s foreign policy maneuvers in Iran will contribute to higher U.S. gasoline prices.

“That means that US policy will have an even more outsized effect on oil prices in the months ahead,” Cohen said.

EIA’s Summer Fuels Outlook projected gasoline prices to be higher this year due to crude oil prices.

“Gasoline prices are forecast to be higher this summer compared with last year primarily because of Brent crude oil prices,” the agency writes.

Between April and early May, EIA adjusted its summer forecasts for crude oil up, reflecting higher prices per barrel that would result in higher gasoline prices this summer.

The Price of Gasoline

Geopolitical considerations aside, retail prices for gasoline should peak between April and June 2018, before beginning to move downward by September, EIA added.

The agency cautioned that daily and weekly national average prices will fluctuate and “differ significantly” from monthly and seasonal average, and can have high variability within and between regions. Additionally, unplanned refinery outages or other disruptions can lead to higher regional prices. For example, West Coast gasoline prices could average more than 75 cents more per gallon than in other areas, like the Gulf Coast.

Regular gasoline prices are driven by four components: taxes, distribution and marketing, refining, and crude oil costs. EIA analysis for March 2018 broke down the price of a gallon of gas at 18 percent for taxes, 11 percent for distribution and marketing, 14 percent for refining, and the largest component, at 57 percent, on the price of crude oil.

“Oil represents the largest component of U.S. gasoline prices. Crude oil price increases almost always get passed through to consumers in pump price increases,” Book told Western Wire.

The contribution of crude oil to the overall price of gasoline has moved up 8 points from 49 percent last April, EIA estimates show.

According to EIA, because gasoline taxes and retail distribution costs are stable, any variation in price can be primarily attributed to “changes in crude oil prices and wholesale margins.”

“Absent other factors specific to the gasoline and diesel fuel markets, each dollar per barrel of sustained price change in crude oil compared with the forecast translates into a 2.4-cent-per-gallon change in product prices,” EIA added.

Seasonal Demand

Combined with rising crude oil prices, rising consumption and demand as a result of increased travel will add additional pressure to gasoline prices this summer.

“For summer 2018, EIA forecasts motor gasoline consumption to average 9.56 million barrels per day (b/d), up almost 20,000 b/d (0.2%) compared with last summer’s record high. Highway travel is forecast to be 1.3% higher than last summer,” EIA writes.

Seasonal demand and special requirements for summer fuel mixes push gas prices higher from the spring into the summer months, according to EIA. “Historically, retail gasoline prices tend to gradually rise in the spring and peak in late summer when people drive more frequently,” EIA writes. “Gasoline prices are generally lower in winter months. Gasoline specifications and formulations also change seasonally. Environmental regulations require that gasoline sold in the summer be less prone to evaporate during warm weather. This requirement means that refiners must replace cheaper but more evaporative gasoline components with less evaporative but more expensive components.”

The seasonal demand has led to a difference of approximately 36 cents per gallon in the average monthly price of U.S. retail gasoline, rising from January lows and peaking in August, according to data from 2000 to 2017.

Growing GDP Puts Pressure On Oil Consumption

A growing economy and additional discretionary spending, seen in the surge of expected travel over Memorial Day weekend and lasting through the summer, will add to the pressure on fuel consumption, as the “strong global economic growth signals” in the U.S. and abroad exercise upward momentum on gasoline prices, the most in six years.

“[G]lobal liquid fuels consumption is quickly increasing. EIA estimates global oil consumption-weighted gross domestic product (GDP) growth for 2018 will be at its highest rate since 2012,” the EIA wrote last week. “Greater GDP growth has the potential to increase oil consumption beyond forecasted levels, which could put upward pressure on crude oil prices, and simultaneously drive systemic market movements in equities, bonds, and other commodities, which are often correlated with movements in crude oil prices.”

OPEC Pulls Production

The EIA weekly report on petroleum for May 16 showed, “Total world petroleum and other liquids consumption, on the other hand, increased by an estimated 1.9 million b/d [barrels per day] between the first quarters of 2017 and 2018, exceeding the growth in production and resulting in inventory declines.”

Market demand worldwide offset the increase in production of 1.6 million b/d, with “most of this growth [coming] from increased crude oil production in the United States, which increased by 1.2 million b/d, from 9.0 million b/d to 10.2 million b/d.”

Part of the reduction in supply comes from the decision by the Organization of the Petroleum Exporting Countries (OPEC) in 2016 to correct the “oversupply” in the global market by cutting production, therefore reducing global inventories.

“The extended period of oversupply in global petroleum markets that began before the Organization of the Petroleum Exporting Countries (OPEC) November 2016 agreement to cut production has ended, and the large buildup of global inventories during that period has now been drawn down,” EIA writes.

According to EIA, those production cuts will remain in place until the end of 2018.

Book said that global markets are acting more quickly in the current market than they were in past years, including a more rapid reaction to price sensitivity.

“Today’s high prices have potential to self-correct considerably faster than they might have a decade ago. We see newfound dynamism on both sides of crude balances,” Book said. “Economic growth has stoked demand and contributed to falling OECD [Organization for Economic Co-operation and Development] petroleum inventories, a figure that exhibits a strong inverse correlation with crude prices.”

As demand increases and supply falls, prices respond accordingly, rising in the short-term to find a new equilibrium. As prices rise, however, demand will fall, and according to Book, the response time is much shorter in the present market.

“Even so, I would also suggest that global petroleum demand appears to respond to price more than it did a decade ago, and high prices are probably already slowing demand growth,” Book said. “I would note that U.S. tight oil production responds to high prices, too, and it tends to be about four times as price-elastic, based on data from the last eight years, as OPEC.”

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