HOUSTON — Oil prices are increasing, again, casting a shadow over the economy, driving up inflation and eroding consumer confidence.
Crude prices rose more than 15% in January alone, with the global benchmark price crossing $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 months away, the average price for regular gasoline is fast approaching $3.40 a gallon, roughly a dollar higher than it was a year ago, according to AAA. The Biden administration said in November that it would release 50 million barrels of oil from the nation’s strategic reserves to relieve the pressure on consumers, but the move hasn’t made much of a difference.
Many energy analysts predict that oil could soon touch $100 a barrel, even as electric cars become more popular and the coronavirus pandemic persists. Exxon Mobil and other oil companies that only a year ago were considered endangered dinosaurs by some Wall Street analysts are thriving, raking in their biggest profits in years.
Western oil companies, partly under pressure from investors and environmental activists, are drilling fewer wells than they did before the pandemic to restrain the increase in supply. Industry executives say they are trying not to make the same mistake they made in the past when they pumped too much oil when prices were high, leading to a collapse in prices.
Elsewhere, in countries like Ecuador, Kazakhstan and Libya, natural disasters and political turbulence have curbed output in recent months.
“Unplanned outages have flipped what was thought to be a pivot towards surplus into a deep production gap," said Louise Dickson, an oil markets analyst at Rystad Energy, a research and consulting firm.
On the demand side, much of the world is learning to cope with the pandemic and people are eager to shop and make other trips. Wary of coming in contact with an infectious virus, many are choosing to drive rather than taking public transportation.
But the most immediate and critical factor is geopolitical.
A potential Russian invasion of Ukraine has “the oil market on edge," said Ben Cahill, a senior fellow at the Center for Strategic and International Studies in Washington. “In a tight market, any significant disruptions could send prices well above $100 per barrel," Cahill wrote in a report this week.
Russia produces 10 million barrels of oil a day, or roughly one of every 10 barrels used around the world on any given day. Americans would not be directly hurt in a significant way if Russian exports stopped, because the country sends only about 700,000 barrels a day to the United States. That relatively modest amount could easily be replaced with oil from Canada and other countries.
But any interruption of Russian shipments that transit 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 does not have the spare capacity to replace Russian oil.
Western oil companies that have pledged not to produce too much oil would most likely change their approach if Russia was unable or unwilling to supply as much oil as it did. They would have big financial incentives — from a surging oil price — to drill more wells. That said, it would take those businesses months to ramp up production.
In addition, if Russian supplies are suddenly reduced, Washington is likely to put pressure on Saudi Arabia to raise production independently of the cartel. Analysts think that the kingdom has several million barrels of spare capacity that it could tap in a crisis.
But the direct economic effect on the nation would be more modest than in previous decades because the United States produces more and imports less oil since drilling in shale fields exploded around 2010 because of hydraulic fracturing. The United States is now a net exporter of fossil fuels, and the economies of several states, particularly Texas and Louisiana, could benefit from higher prices.
And the United States and its allies could restore a 2015 nuclear agreement with Iran that former President Donald Trump abandoned. Such a deal would allow Iran to sell oil much more easily than now. Analysts think the country could export 1 million or more barrels daily if the nuclear deal is revived.
First Published: Feb 03, 2022, 12:21
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