Why are oil prices high, and is any relief in sight?

NEW YORK — Anyone who has recently bought food, paid rent or looked for a used car has come up against runaway inflation that has engulfed the US economy.

And, with soaring oil prices keeping gasoline high, so does anyone who has filled up a car.

Energy costs were a major driver of what became the highest inflation in a generation. In recent days, the price of a barrel of benchmark U.S. crude has hit a seven-year high – $87 a barrel, a staggering jump of around 36% since Dec. 1.

This price surge reversed an almost equally steep drop that began in late October. Since oil has a direct effect on gasoline and home heating oil prices, consumers have been battered by the wild volatility. For now, a gallon of regular gasoline costs an average of $3.33, according to AAA, up from $2.40 a year ago.

What is going on?

For one thing, the ever-changing state of the viral pandemic has upended both supply and demand. As a result, energy has been gripped by violent price swings.

“COVID has turned everything upside down,” said AAA spokesman Andrew Gross. “It even made a lack of predictability even more unpredictable.”

Other factors also kept energy prices high. And most analysts say they think the prospects for quick relief are dim. More urgently, Russia’s buildup of a military presence along the Ukrainian border has raised fears of an imminent invasion and a consequent impact on global energy supplies.

Tensions with Russia

Russia provides plenty of oil and gas to the rest of the world – a supply that could be cut if tensions escalate to an invasion.

As it stands, Russia has deployed around 100,000 troops near the Ukrainian border and demanded that NATO promise never to allow Ukraine to join – a request Russia is unlikely to see. satisfied. On Sunday, the US State Department ordered the families of US Embassy staff in Ukraine to leave the country.

Any Russian invasion of Ukraine would almost surely trigger economic sanctions from the United States and its European allies. This could lead to oil and gas shortages around the world and, most likely, higher energy prices.

Russia provides 30-40% of Europe’s oil, gas and coal, noted Kevin Book, managing director of Clearview Energy Partners. In any given year, he said, Russian exports provide 4-5% of the world’s energy.

“So what does the world do if you have a threshold of a significant amount like this 5%?” Book says. “Well, the price is going up everywhere.”

Who’s wrong?

The pain of high gas prices has hit public-facing workers the most, a disproportionate number of whom are low-income commuters who need to get to work. On the other hand, office workers who had the option of working mainly or exclusively from home suffered less from the price impact.

A year ago at this time, the typical family was spending about $30 a week on gasoline. Now, for the same amount of fuel, they spend about $43 a week, according to the National Energy Assistance Directors Association. It’s a particularly heavy toll at a time when households are struggling with inflation in other sectors of the economy and when a child tax credit has just expired.

“Those who are frontline workers, who have children they need to drive to school, to the dentist and other essential trips – they will bear the full brunt of these increases,” said Mark Wolfe, director executive of the energy assistance association. “There’s not a lot of room to shrink.”

Household heating oils could also become more expensive. But Wolfe noted that many people have already filled their fuel tanks for the winter, so higher prices will have less of an effect on families than higher gasoline prices.

Weren’t the prices supposed to come down?

After oil and gas prices spiked in the fall, people had good reason to hope that prices would come down. President Joe Biden took action in November to try to suppress rising energy prices by announcing that the United States and other countries would release oil from their strategic petroleum reserves. Prices fell in anticipation of the announcement. In the end, however, this decision was not enough to stop the price increase.

Then the omicron variant of the coronavirus began to hit cities around the world hard. People expected oil prices to fall because typically when a wave of the virus overtakes a community, people travel less and there is less demand for fuel. Traffic is actually down in many parts of the world by 8% or 9%, said Claudio Galimberti, senior vice president of Rystad Energy.

“The market seems to have overlooked these important details,” he said.

And even with these traffic drops, there still isn’t enough oil for everyone. Some countries that are part of the OPEC+ oil cartel are producing less oil than they promised during recent negotiations. And many American companies slowed oil production at the start of the pandemic and did not return to previous production levels.

When will this end?

No one is certain.

The cold winter months we are experiencing are generally not the ideal time for drivers to hit the road. And as the weather gets warmer, there is usually more demand for fuel, which usually increases prices. Thus, the mere passage of time will not necessarily solve the problem.

“With more people on the roads, it’s probably going to go on like this for a while,” said AAA spokesman Andrew Gross.

It’s unclear what, if anything, the federal government can do to help. Biden’s decision to sell oil from the Strategic Petroleum Reserve had little lasting impact.

Natural gas shortages in Europe and Asia are also contributing to the problem. When gas supplies were low last fall, buyers in Europe and Asia engaged in bidding wars for cargoes of LNG or liquefied natural gas, sending those prices skyrocketing.

In some markets, energy providers have started burning oil to generate electricity instead of using expensive natural gas, which has further depleted oil supplies and also contributed to the price spike. The United States has accelerated its LNG exports to Asia and Europe, and energy analysts expect that to continue.

The biggest unknown variable is whether Russia goes ahead and takes military action against Ukraine and how the United States and its European allies would react then.

“We don’t know exactly what they’re going to do,” Book said. “But one thing is pretty clear: Europe’s energy sector is very much at risk, even without all our sanctions.”

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