Why are oil prices so high and will they remain so?

HOUSTON — Oil prices are rising, yet again, casting a shadow over the economy, pushing up inflation and eroding consumer confidence. Cr...


HOUSTON — Oil prices are rising, yet again, casting a shadow over the economy, pushing up inflation and eroding consumer confidence.

Crude prices rose more than 15% in January alone, with the global benchmark price topping $90 a barrel for the first time in more than seven years, as fears of a Russian invasion of Ukraine were increasing.

Although the summer driving season is still months away, the average regular gasoline price is fast approaching $3.40 a gallon, about a dollar higher than a year ago, according to AAA.

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

Many energy analysts are predicting that oil could soon hit $100 a barrel, even as electric cars become more popular and the coronavirus pandemic lingers. Exxon Mobil and other oil companies that only a year ago were considered endangered dinosaurs by some Wall Street analysts are booming, racking up their biggest profits in years.

The pandemic has caused energy prices to plummet in 2020, even sending the Benchmark US oil price below zero For the very first time. But prices rebounded faster and more than many analysts expected, largely because supply failed to keep up with demand.

Western oil companies, partly under pressure from investors and environmental activists, are drilling fewer wells than before the pandemic to limit rising supply. Industry executives say they are trying not to make the same mistake they have made in the past when they pumped too much oil when prices were high, causing prices to crash.

Elsewhere, in countries such as Ecuador, Kazakhstan and Libya, natural disasters and political turbulence have dampened production in recent months.

“The unplanned outages turned what was thought to be a pivot to a surplus into a deep production gap,” said Louise Dickson, oil markets analyst at Rystad Energy, a research and advisory firm.

On the demand side, much of the world is learning to cope with the pandemic and people are eager to shop and take more trips. Fearing coming into contact with an infectious virus, many choose to drive rather than take public transport.

But the most immediate and critical factor is geopolitics.

A potential Russian invasion of Ukraine has “the oil market on edge,” said Ben Cahill, senior fellow at the Center for Strategic and International Studies in Washington. “In a tight market, any significant disruption could push prices well above $100 a barrel,” Cahill wrote in a report this week.

Russia produces 10 million barrels of oil a day, or about one in every 10 barrels used worldwide every day. Americans would not be directly affected in any significant way if Russian exports stopped, as the country only sends about 700,000 barrels a day to the United States. This relatively modest amount could easily be replaced by oil from Canada and other countries.

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

Even if Russian oil shipments are not halted, the United States and its allies could impose sanctions or export controls on Russian companies, limiting their access to equipment, which could gradually reduce production there. .

In addition, the interruption of Russian natural gas exports to Europe could force some utility companies to generate more electricity by burning oil rather than gas. This would increase demand and prices worldwide.

The United States, Japan, European countries and even China could release more crude from their strategic reserves. Such measures could be useful, especially if a crisis is short-lived. But the reserves would not be sufficient if Russian oil supplies were interrupted for months or years.

Western oil companies that have pledged not to produce too much oil are likely to change their approach if Russia is unable or unwilling to supply as much oil as it has. They would have great financial incentives – from a rising oil price – to drill more wells. That said, it would take these companies months to ramp up production.

President Biden has urged the Organization of the Petroleum Exporting Countries to pump more oil, but several members have not met their monthly production quotas, and some may not have the capacity to ramp up production quickly. OPEC members and their allies, including Russia, agreed on Wednesday to stick to a plan to increase production next month from a relatively modest level of 400,000 barrels per day.

Moreover, if Russian supplies are suddenly reduced, Washington is likely to pressure Saudi Arabia to increase production independently of the cartel. Analysts believe the kingdom has millions of barrels of spare capacity it could tap into in a crisis.

A sharp rise in oil prices would push gasoline prices even higher, hurting consumers. Working-class and rural Americans would be hit hardest 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 income, so price increases hit them harder than wealthier people or city dwellers who have access to trains and buses.

But the direct economic impact on the nation would be more modest than in previous decades as the United States produces more and imports less oil since drilling in shale fields exploded around 2010 due to fracking. The United States is now a net exporter of fossil fuels, and the economies of several states, including Texas and Louisiana, could benefit from higher prices.

Oil prices go up and down in cycles, and there are several reasons why prices could fall over the next few months. The pandemic is far from over and China has shut down several cities to stop the spread of the virus, slowing its economy and energy demand. Russia and the West could reach an agreement – formal or tacit – that prevents a full-scale invasion of Ukraine.

And the United States and its allies could reinstating a 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 today. Analysts believe the country could export a million barrels or more a day if the nuclear deal is revived.

Ultimately, high prices could depress oil demand enough for prices to start falling. One of the main financial incentives for buying electric cars, for example, is that electricity tends to be cheaper per kilometer than gasoline. Sales of electric cars are growing rapidly in Europe and China and increasingly in the United States.

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Newsrust - US Top News: Why are oil prices so high and will they remain so?
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