Why are oil prices so high and will they continue to be?

HOUSTON – Oil prices are rising again, casting a shadow over the economy, increasing inflation and eroding consumer confidence.

Crude oil prices jumped more than 15% in January alone, with the global benchmark surpassing $90 a barrel for the first time in more than seven years, as fears of a Russian invasion of Ukraine grew.

Although the summer driving season is still a few months away, the average price of regular gasoline is rapidly hitting $3.40 a gallon, nearly a dollar higher than it was a year ago, according to AAA. AAA.

In November, the Biden administration said it would release 50 million barrels of oil from the nation’s strategic reserves to ease pressure on consumers, but the move didn’t make much of a difference.

Many energy analysts predict that oil could soon hit $100 a barrel, even as electric cars become more common and the coronavirus pandemic continues. Exxon Mobil and other oil companies that just a year ago were seen by some Wall Street analysts as endangered dinosaurs are thriving, reaping their biggest profits in years.

Pandemic lowers energy prices in 2020, even bringing US benchmark oil price below 0 For the first time. However, prices have rebounded faster and more than many analysts expected in large part because supply has not kept up with demand.

Western oil companies, partly under pressure from investors and environmentalists, are drilling fewer wells than they did before the pandemic to contain a surge in supply. Industry executives say they are trying not to make the same mistake in the past when they pumped too much oil when prices were high, leading to a price drop.

In other countries such as Ecuador, Kazakhstan and Libya, natural disasters and political instability have limited output in recent months.

“The unplanned shutdown has turned what was supposed to be a pivot towards surplus into a gap,” said Louise Dickson, an oil market analyst at Rystad Energy, a research and consulting firm. deep production”.

In terms of demand, much of the world is learning to deal with the pandemic, and people are eager to shop and take other trips. Despite being exposed to a contagious virus, many people are choosing to drive instead of using public transport.

But the most immediate and critical factor is geopolitics.

Ben Cahill, a senior fellow at the Center for Strategic and International Studies in Washington, said a potential Russian invasion of Ukraine puts “the oil market in a competitive position”. “In a tight market, any significant disruption could send prices well above $100 per barrel,” Cahill wrote in a note this week.

Russia produces 10 million barrels of oil a day, or about one out of every 10 used around the world on any given day. Americans would not be directly harmed significantly if Russian exports stopped, as the country only sends about 700,000 bpd to the US. That relatively modest amount could easily be replaced by oil from Canada and other countries.

But any disruption to Russian shipments through Ukraine, or the sabotage of other pipelines in Northern Europe, would paralyze much of the continent and distort global energy supply chains. bridge. That’s because, traders say, the rest of the world doesn’t have the capacity to replace Russian oil.

Even if Russian oil shipments were not disrupted, the US and its allies could impose sanctions or export controls on Russian companies, limiting their access to equipment. , which can gradually reduce the country’s output.

Additionally, disruptions in Russian natural gas exports to Europe could force some utility companies to produce more electricity by burning oil rather than gas. That will increase demand and prices worldwide.

The United States, Japan, European countries and even China could release more crude from their strategic reserves. Such moves can be helpful, especially if a crisis is short-lived. But reserves will not be enough if Russia’s oil supply is disrupted for months or years.

Western oil companies that have pledged not to produce too much oil will most likely change their approach if Russia is unable or unwilling to supply as much oil as they did. They will have great financial incentives – from soaring oil prices – to drill more wells. That said, those businesses will take months to ramp up production.

President Biden has urged the Organization of the Petroleum Exporting Countries to pump more oil, but some members have failed to meet their monthly production quotas and some may not be able to rapidly increase output. OPEC members and their allies, including Russia, are meeting this week and are likely to agree to continue gradually increasing output.

In addition, if Russian supplies are cut suddenly, Washington will most likely pressure Saudi Arabia to increase production independent of the cartel. Analysts say the kingdom has several million barrels of spare capacity that it can tap into during a crisis.

Soaring oil prices will push gasoline prices even higher, and that will hurt consumers. Working-class and rural Americans will be most vulnerable because they tend to drive more. They also drive older, less fuel-efficient vehicles. And energy costs tend to make up a larger percentage of their incomes, so price increases hit the wealthier or city dwellers who can afford to ride trains and buses.

But the direct economic impact on the country will be more modest than in previous decades as the United States produces more and imports less oil since drilling in shale fields exploded around A.D. 2010 because of hydraulic fracturing. The United States is currently a net exporter of fossil fuels, and the economies of some states, notably Texas and Louisiana, could benefit from higher prices.

Oil prices go up and down in cycles, and there are a number of reasons why prices could fall over the next few months. The pandemic is far from over, and China has closed several cities to stem the spread of the virus, slowing its economy and energy needs. Russia and the West could reach an agreement – formally or implicitly – that would prevent a full-blown invasion of Ukraine.

And the United States and its allies can restore 2015 nuclear deal with Iran that former President Donald J. Trump abandoned. Such an agreement would allow Iran to sell oil much more easily than it currently does. Analysts say the country could export a million barrels or more a day if the nuclear deal is reinstated.

Ultimately, high prices can reduce demand for oil enough for prices to start going down. For example, one of the main financial incentives to buy an electric car is that electricity tends to be cheaper than gas per mile. Sales of electric cars are growing rapidly in Europe and China and increasingly in the United States.

https://www.nytimes.com/2022/02/02/business/economy/oil-price.html Why are oil prices so high and will they continue to be?

Fry Electronics Team

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