Session 6/7, the world oil price crossed USD 100/barrel for the first time since April, raising hopes among politicians, business owners and drivers around the world that the days of skyrocketing fuel prices may be coming to an end.
Unfortunately, that day cannot come soon, according to Bloomberg. The fundamentals of supply and demand in the market suggest that oil prices will remain high for many months, even years.
Demand for fuel is still growing strongly in the context that the world has just come out of the Covid-19 pandemic and reopened. Not only that, we don’t have enough refineries to turn oil into gasoline. The world’s largest oil companies are trying to break down barriers that prevent them from increasing their capacity. And it is impossible not to mention the tensions in Ukraine that have led Russian President Vladimir Putin to cut gas exports to Europe.
Forecast of global oil demand by IEA (bpd)
“The world has never seen such a major energy crisis, in all respects. The whole world is affected,” Fatih Birol, head of the International Energy Agency IEA said at a conference. event on 7/12. Worse, he thinks the worst is yet to come.
The impact of high oil prices on the international political and economic picture is enormous. In the US, gasoline prices are up 42 percent this year, pushing inflation to its highest level in more than 40 years. High gasoline prices are also one of the reasons Democrats are at a disadvantage and risk Republicans regain control of Congress in the midterm elections later this year. From Peru to Sri Lanka, rising fuel prices are causing social unrest. The clean energy revolution that world leaders have hotly debated in recent years is now in danger of being pushed aside due to the risk of energy shortages.
In the spring of 2020, the Covid-19 pandemic broke out, pushing energy demand to its lowest level in decades. The oil price even fell below zero. But right now, everything has completely turned around. The IEA predicts that the total amount of oil consumed by the world will surpass pre-epidemic levels by 2023.
It will take a long time to catch up with the offer. In a report last month, JPMorgan Chase outlined the prospect of oil prices rising to $380 if Russia decided to pull millions of barrels of oil from the market. Although Russia has found alternative customers in China and India, the impact of sanctions has reduced total Russian production by more than 1 million barrels per day and many countries fear their partner Moscow.
It’s hard to find a supply strong enough to replace Russia. OPEC, which produces about 40% of the world’s total crude oil, is struggling to meet its production target. Deteriorating infrastructure, years of declining investment and political instability are the reasons for the decline in production. In May, OPEC+ production fell 2.7 million barrels per day from target.
Hopes for OPEC’s delivery are pinned on two members that currently have overcapacity: Saudi Arabia and the UAE. In an effort to increase supply to help cool oil prices, US President Joe Biden plans to visit Saudi Arabia and meet Crown Prince Mohammed bin Salman — whom he previously declined to talk to, including by phone. But it remains unclear to what extent Saudi Arabia and the UAE can increase production. Oil and gas company Aramco claims to be able to produce 12 million barrels per day, but in fact that number has only been reached once.
French President Emmanuel Macron was told by the UAE leader at a G7 meeting that the UAE is currently at maximum capacity.
There is no sign that the US shale industry is ready to save the world. It is true that mining operations in Texas and New Mexico are becoming increasingly crowded. But the rest of the US oil industry is in a state of stagnation. Total daily production in the US is still 1 million barrels lower than before the epidemic.
The problem isn’t just oil companies that can’t produce more oil. Some don’t even want to. The five largest oil companies in the world plan to invest a total of $81.7 billion this year, only half of what they spent in 2013. American shale companies have tried. trying to cut spending after years of “burning money” without much effect. In Europe, large companies are switching from oil to cleaner energy.
In addition, there are bottlenecks in the oil refining industry. The pandemic has forced outdated and inefficient businesses to close, leaving the world so supply-starved that the price of crude oil is no longer an accurate measure of the price consumers pay. For example, the oil price in the US fell by 13% last month, while the price of gasoline fell only 6.5%.
Again, this is a story of imbalance between supply and demand due to a sudden spike in demand. After 2 years of all kinds of restrictions due to Covid, the demand for both road and air travel has soared, almost back to pre-epidemic levels. A wave of rate hikes and fears of a global recession will dampen demand, but history shows that economic downturns rarely cause a sharp drop in fuel consumption.
Some argue that high oil prices will push the world away from fossil fuels faster. However, the transition to clean energy has many obstacles. In the current dire situation, even the countries that set the most ambitious climate change goals are inclined to spend billions of dollars to keep traditional fuels cheap. More than 20 countries have applied price subsidies to stem the rise in gasoline prices, according to Bloomberg statistics.
Because expensive gasoline has a huge impact on inflation, and that puts upward pressure on interest rates, renewable energy companies face rising costs of capital. 20 million electric cars worldwide are not enough to quench the thirst for fuel. Crude oil demand for road transport is estimated to peak by 2027
In a recent report, Citigroup optimistically predicted that the price of oil could fall to $65/barrel if the global economy enters a recession. According to the bank, oil demand only falls in the worst recessions, but oil prices fall in every recession.
On July 8, however, Russian President Putin warned the opposite. He believes that the West made a mistake by importing Russian oil. If this continues, the global energy market will face “serious, even more serious, consequences”.
Consult Bloomberg
