According to experts, the recent surge in oil prices is unlikely to have much of an impact on the global recovery, as solid growth and affluent consumers in advanced nations would enable the globe to absorb much of the blow from more expensive crude.
Increasing worldwide demand and disagreement oversupply levels among members of the Organization of Petroleum Exporting Countries and allies pushed US crude oil futures prices above $75 per barrel earlier this month, the highest level in six years. Prices in the United States have subsequently fallen, but they remained around $70 per barrel on Thursday, almost where they were in the fall of 2018.
The oil burden, or the cost of oil as a percentage of GDP, is one statistic to keep an eye on since it is a predictor of oil’s influence on growth. According to Morgan Stanley, this indicator is predicted to climb to 2.8 percent of global GDP in 2021, assuming an average oil price of $75 per barrel this year. However, this remains lower than the long-term average of 3.2 percent.
Petroleum is the crown gem of commodities, utilized in a variety of applications ranging from plastics to asphalt to gasoline. The oil sector is a financial behemoth, and variations in oil prices are keenly monitored by governments, corporations, investors, and traders.
Volatile oil prices have the potential to send shockwaves throughout the global economy. Oil prices are also influenced by changes in supply and demand. Oil, on the other hand, is not a diamond or caviar — luxuries with little utility that most people can go without. Because oil is plentiful and in high demand, its price is mostly determined by market forces.
Multiple factors influence oil prices, including the fundamental economic idea of supply and demand. According to the law of supply and demand, if supply grows, prices will fall. In contrast, as demand grows, so should pricing. As a result, the issue remains: What influences the supply and demand for oil?
According to the International Monetary Fund, the global economy will increase by 6% this year, the strongest rate in at least four decades.
According to the Federal Reserve Bank of New York, the recent price increase has been driven mostly by growing demand rather than supply issues. According to economists, higher prices produced by strong demand rather than supply concerns typically imply resilient growth.
Furthermore, sophisticated economies are substantially less sensitive to oil price hikes than they were decades ago since services consume less oil than heavy industries and account for a larger part of the production. According to figures from the Energy Information Administration, it currently takes almost half as much oil to create a dollar of gross domestic product in the United States.
Analysts predict that China’s economy will continue to develop strongly this year, at roughly 8%. Higher oil prices, along with those for many other commodities, have dragged on certain imports, but the nation’s manufacturing indicators show that local demand remains strong, according to Natixis, an investment bank.
According to global resources consultants S&P Global Platts, Chinese refineries are turning to local stockpiles and increasing domestic output to relieve the strain from increased global pricing.
Certain international economies, on the other hand, maybe more vulnerable. Consumers in emerging markets are typically more sensitive to rising costs since food and energy account for a larger amount of their spending. In recent weeks, a number of central banks, notably Brazil and Russia, have been compelled to hike interest rates in order to combat growing inflation.
Every $10 increase in oil prices adds more than $4 billion to Turkey’s current-account deficit, increasing the country’s reliance on foreign cash to pay the deficit and service foreign debt. According to Morgan Stanley, it also contributes about 0.5 percent to inflation. A $10 increase in oil prices contributes 0.5 percent of GDP to South Africa’s and India’s current-account deficits.
Russia and Ukraine Tensions
The political uncertainty that began in late 2021 and increased in early 2022 resulted in a 35% increase in the price of West Texas Intermediate crude oil (WTI). Russian authorities cautioned in mid-December 2021 that Ukraine should not be admitted to the North Atlantic Treaty Organization (NATO) and that NATO soldiers should be removed from Eastern Europe. The United States and NATO refused, and the resulting tensions would roil energy markets.
Russia resumed military operations in Ukraine in early 2022, focusing on separatist territories in the east and other targets within the country. As a consequence, WTI oil prices rose from $74.32 on December 15, 2021, to $100, while Brent crude rose to moreover $105 in the early 2022 intraday trade.
Monetary sanctions imposed as a result of geopolitical conflicts can also cause volatility in the energy markets. On February 22, 2022, US President Joe Biden announced penalties that included the freezing of two state-owned Russian financial firms and their subsidiaries that provide finance to Russia’s military. Sanctions also prohibited the acquisition of Russian sovereign debt in the United States and targeted Russian leaders and their families.
On February 24, 2022, sanctions were broadened to cover additional Russian financial institutions, including the two largest banks — Sberbank and VTB Bank — blocking access to the US financial system. Individuals in the United States are also barred from purchasing both new and existing Russian government debt on the secondary market. Russian elites and their families have been financially targeted, and export bans have been implemented to prevent technology items from being imported into Russia.
The Verdict
The petroleum industry is extremely complicated, having several components to govern. As with any free market, the inherent principles of supply and demand play a major part. However, each is influenced by oil industry components such as refining capabilities, oil reserves, and foreign affairs.
