Why Is The Price Of Oil Rising?
This is an attempt to encourage some to consider the factors which underlie oil prices and, in particular, those contributing to the current high price of oil.
S E E D E D C O N T E N T
Every time Americans stop at a gas station to fill the tank, they get another economics lesson.
The average price of a gallon of gasoline recently hit an all-time high of $4.17, according to AAA, compared to $2.77 one year ago. Drivers in California need to fork over an average price of $5.44 a gallon.
Ballooning prices are Americans' top concern for 2022, more worrying than their ability to pay bills or broader inflation, according to a recent eMoney Advisor survey.
Record gasoline prices are a direct result of climbing oil prices. The price of oil bottomed out in spring 2020 during the Covid-19 crash, but today a barrel of oil fetches almost $130 in the U.S., with higher prices a direct result of Russia's invasion of Ukraine—aided by strong consumer demand as the world moves on from Covid-19 and weak supply as the leading oil-producing nations throttle output.
Russia's War on Ukraine and the Price of Oil
Russia's war in Ukraine went from a threat to reality in late February, which caused crude oil prices to briefly rise above $100 a barrel before retreating back towards $90. Over the following two weeks, crude oil priced climbed steadily as the U.S. and its western allies imposed crippling sanctions on Russia.
Energy giants such as Shell, BP and Exxon all pulled out of Russian energy deals, while the Biden administration has announced a ban on importing Russian oil and other petroleum products, which represents about 8% of U.S.-bound crude shipments.
"The Russia-Ukraine crisis significantly changed global oil supply forecasts and this is a key input into how oil is priced globally," said David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif. "The recent speed of oil's surge is truly a matter of changing supply and demand dynamics, and not about traders and speculators trying to make a quick profit."
After a few years of respite, geopolitical risk has re-entered the fray, and markets are sensitive to the latest news of tensions ramping up or slowing down. This situation isn't going away any time soon.
"Nothing tells me that the supply and demand imbalance and geopolitical risks are going away near term," said David Petrosinelli, senior trader at InspereX. "It's a major issue, and people should be concerned."
The Demand Component of Higher Oil Prices
When the Covid Recession hit the U.S. nearly two years ago, oil prices tanked along with the stock market. As the novel coronavirus spread around the globe, governments rapidly imposed lockdowns in an attempt to protect their citizens. Lockdowns drove unprecedented economic disruptions, resulting in less energy demand and falling oil prices.
Oil demand came back strong later in 2020 as national governments and central banks pumped trillions of dollars into the global economy to support workers and the unemployed. By early 2021, oil had climbed back to pre-pandemic price levels.
"Oil demand has recovered swiftly over the past year, even with several Covid waves making their way around the world," reads a Bank of America research note. "In fact, demand in [the last three months of] 2021 was likely within 1 million barrels per day of pre-pandemic levels."
OPEC Production Cuts Mean Higher Oil Prices
In April 2020, a spat between Russia and Saudi Arabia over proposed output cuts in response to the new Covid-19 pandemic spooked investors, causing the price of oil to fall to historic lows in April 2020.
But that was then. The problem now is that the oil supply hasn't kept up with recovering demand.
"The quick rebound in consumption caused crude oil and refined product inventories to fall swiftly from record high levels in mid-2020 to multi-year lows in late 2021," according to the Bank of America note.
That's why the Biden administration, despite arguing for less fossil fuel consumption overall, has called on the Organization of Petroleum Exporting Countries (OPEC) and its allies to increase oil production.
"The idea that Russia and Saudi Arabia and other major producers are not going to pump more oil so people can have gasoline to get to and from work, for example, is not right," Biden said at the most recent G-20 meeting.
Saudi Arabia, OPEC's most important member nation, produced 10.8 million barrels of oil per day in 2020, according to the U.S. Energy Information Administration. That's down from 12.1 million two years earlier.
OPEC's plan to throttle back its oil wells, and the commitment to that plan, "will likely maintain upward pressure on prices," said CFRA chief investment strategist Sam Stovall.
U.S Oil Production Slow to Respond
In the U.S., oil producers aren't in a hurry to expand production.
"The U.S. oil rig count is currently at 520, after hitting a low of 295 a year ago," said Mace McCain, chief investment officer at Texas-based Frost Investment Advisors. "We are still well below the 2014 high of 1,609 rigs operating. The oil majors are reluctant to increase exploratory spending by the big producers, a trend that's been growing since 2015."
Why? For one thing, they don't want to invest heavily on new wells only to see supply increase, prices decline and their profits dwindle.
This was a major theme of the fracking boom that helped propel the U.S. to become the number one global oil-producing nation over the last decade and a half. Many companies went bankrupt as they overextended themselves building out infrastructure, only to see oil and gas prices plummet on greater and greater supply.
Meanwhile, there's a large push by some of the world's largest institutional investors, including BlackRock, to steer investment toward companies with low levels of environmental, social and governance (ESG) risk. That's moved money away from oil and gas producers when those dollars would help increase production.
"Underinvestment because of ESG is one of the confluence of issues causing the price to increase," Jack McIntyre, a portfolio manager at Brandywine Global, said.
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In short:
The psychology of 'the USA is moving to reduce its dependence on oil' does affect suppliers. This is, however, but one factor. We do not have a shortage of crude nor do we have a shortage of resources to supply refined oil products. We mostly have executives focused on the best way to maximize profit during a dynamic, somewhat unpredictable period of time.
Note: oil futures (the stock market) is another key factor.
i think you hit the nail on the head with that one and its the biggest one , the speculators take into account everything else you mentioned already , then tabulate what the cost could be expected to be and go from there .
I just finished hauling , dust guard( magnesium chloride solution ) through a gas and oil patch from where i live to casper , nothing but jackpumps to see in the middle of no where, and only one single one was in operation that i saw , the rest ,shut down and doing nothing .
Between 3 to 6 years ago every pumpjack in my area of Tarrant Count TX was operating
full time while the prices were between $2.14 and $2.74.
As the prices went up recently the pump jacks have stopped.
I can only remember passing one this month that was pumping.
same thing up here 2 yrs ago when covid started , everything was moving and working , the past 2 yrs everything came to a halt . lotta the "patch" guys got laid off and went to other jobs in different parts of the country or got different jobs out of the patch , that has to be taken into account as well.
my DOT physical card expired on the 10th , and i have to renew my lic in may , Im thinking its time to just shut down the comm driving at 60 which i turn in the middle of may .
Around here they are in back yards
or small fenced in patches.
One has to assume they are all plumbed to the same
collectors and water separators that are not "buying"
for whatever reason.
The logic seems flawed
Interesting article, but everyone in the know, know that it was the stopping of XLP that is the total cause for the price and shortage. After all, XLP was going to make us energy independent, even though it comes from Canada, some believe that Canada is part of the US.../s
I will now retire to my La Z Brave recliner pop some popcorn and enjoy the all misinformation that will be part and parcel of the commentary.
Yup, I am encouraging (likely futile) partisan-thinkers to maybe take a breath and really try to understand the complex factors (at least at the first level) affecting the current price of oil and stop over-simplifying things into 'Biden did it'. Biden adversely affected the psychology of the market by projecting a clear message of 'USA is actively moving away from its over-dependence on oil'. But he has not prevented producers from providing sufficient supply; they could right now if they wanted to do so.
May the force be with you.
2/3rds of the oil leases aren't even acted on. To make matters worse the leases are often
extended by BLM contrary to their own policies.
Partisan thinkers will, of course, blame Biden's polices. What they do not acknowledge, is that those policies could fail.
"But President Biden and Secretary Haaland face a major barrier to reform. Energy companies already hold leases that entitle them to extract oil and gas on nearly 21 million acres of public lands. Leaseholders currently are only drilling on about half of those leases, giving the fossil fuel industry a generous cushion to continue development even if the Biden Administration implements permanent limits on new leases."
Even if Biden were to call a halt to further leasing, there are still millions of acres leased that have not been explored or drilled. And I am not at all confident that the government could cancel those unused leases without a fairly large payout.
Not to take anything away from the author except to note that with higher prices production is increasing and prices have stabilized and will maybe go down.
Fossil fuels are only going to become more scarce. It currently only costs about $50 to drive a 1,000 H.P. Tesla for 1,000 miles. Just think about that a while.
But those silly voters are going to blame Biden for the price of gas and groceries going sky high, with no relief in sight
Blaming the current PotUS for inflation is normal and routine. Crediting the current PotUS for a good economy is normal and routine. Too bad most voters do not understand that their extremely simplistic cause and effect beliefs do not correlate with the complex reality of economics.
Because "Big Oil" didn't want the arms manufacturers to be the ONLY ones getting filthy rich these days. Inflation only hurts the 99%, not them.
Don't forget the MIC, the Medical-Industrial Complex is doing fine.
How disappointing none of the usual suspects chose to comment.
There are those who care about getting to truth and those who only care about partisan attacks (where truth is collateral damage).
It's a US political norm that we either blame or extend credit to the President based on the economy and gas prices. .
And by the way, American energy production, you wouldn’t always know it, but it went up every year I was president. And you know that whole suddenly America’s like the biggest oil producer … that was me, people. - President Obama Nov 2018
That it is. It is quite naïve but that is generally what happens.