Oil prices rise 'hot' - gain and lose?

World oil prices have continuously established multi-year highs in recent days, after the Organization of the Petroleum Exporting Countries (OPEC) and allied oil producing countries, also known as OPEC+, continued to comply with agreement to increase existing oil production. This adds to inflationary pressures that oil-intensive countries fear will hurt the economic recovery after the pandemic.

An Iranian oil facility. Photo: IRNA
An Iranian oil facility. Photo: IRNA

The big question is how much oil prices will actually go up and what signal it will send to producers and consumers.

Signals from rising oil prices

On October 5, the price of US light sweet crude (WTI) touched its highest level since 2014, while Brent crude oil prices rose to a three-year high, extending gains achieved in the previous session, with the price of US crude oil. these two oils both increased by more than 2%. Bank of America (BoA) even forecasts that oil prices are likely to hit the $100/barrel mark at the beginning of this winter because gas prices have risen to record levels.

The upward movement of oil prices was further consolidated after OPEC +, at its online meeting on October 4, decided to maintain the increase in crude oil production by 400,000 b/d until November 2021 according to the agreement. achieved two months earlier. The decision was made by OPEC+ ministers amid growing pressure from the US and India to increase production after the world oil price increased by 50% since the beginning of this year.

Energy analyst at Commerzbank Research (Germany) Carsten Fritsch said that increased demand and limited supply will likely continue to push up oil prices.

According to Reuters market analyst John Kemp (UK), the strength of price signals depends on the actual price level adjusted for inflation and the rate of change compared to recent years. this.

Over the four decades from 1990 to 2030, the energy market is witnessing a series of significant changes in both policy, production practices and consumption habits, which makes oil price comparisons a challenge. so difficult. Key changes include massive excess capacity in the 1990s, the shale oil revolution from the early 2010s, and the introduction of electric vehicles to compete with fossil fuels in the 2020.

In terms of volatility, oil prices are sending strong signals about the need to increase production and reduce consumption, as the recovery in demand has outstripped supply following the COVID-19 slump. -19.

The price of Brent oil for November delivery is currently trading at more than $82 per barrel, up from less than $38 per barrel in the same period last year, the fastest rate of increase in percentage terms of the three. past decade.

The rapid "escalation" of oil prices is characteristic of the first year of a cyclical upswing, as consumption recovers and growth outstrips supply, while producers continue to remain cautious about increasing output. due to concerns about last year's slump.

The change from a downtrend to an uptrend suggests that it is more likely that oil producers will switch from cutting to increasing production and consumers will use fuel more economically. But considering inflation-adjusted prices, the current signal to producers and consumers has so far been rather ambiguous.

The US Energy Information Administration (EIA) forecasts that global oil demand could increase by 5 million bpd this year, to average 97.4 million bpd, in contrast to a decline of 8.6 million bpd. b/d in 2020. According to the EIA, global oil demand could average 101 million b/d by 2022, roughly equivalent to pre-pandemic crude oil demand. Analysts Chiyoki Chen at futures brokerage Sunward Trading (USA) said that investors remain optimistic even if US oil supply is disrupted after super typhoons. Meanwhile, now is a time of strong demand as many countries relax blockade measures and roll out COVID-19 vaccination programs more widely.

Impact on the global economy

The Wall Street Journal recently published an analysis saying that the recent increase in oil prices is unlikely to have much impact on the global economic recovery. Strong economic growth and strong consumer demand in advanced economies will help countries limit the impact of the shock of higher oil prices.

Economists say countries need to watch for pressure from rising oil prices or the cost of buying oil as a share of Gross Domestic Product (GDP), which is seen as a determinant of oil's impact on the economy. with economic growth. According to Morgan Stanley, the index is expected to grow to the equivalent of 2.8% of global GDP in 2021, assuming oil prices average $75 a barrel this year. However, this is still below the long-term average of 3.2% of GDP.

The International Monetary Fund (IMF) forecasts the global economy will grow about 6% in 2021, the fastest pace in about four decades. According to the US Federal Reserve's (Fed) branch in New York, the recent uptrend in oil prices is mainly due to increased demand, not supply issues. According to economists, this is an indicator of the recovery of economic growth.

Developed economies are less affected by rising oil prices than they were a decade ago, because the service sector, which consumes less energy than heavy industries, accounts for a larger share of total output. economies. According to data from the EIA, the US now needs only about half as much oil to generate $1 of GDP as it did 35 years ago.

European policymakers do not see rising oil prices as a threat to the continent's recovery, at least for now. The European Union (EU) has raised its growth forecast for 2021 from 4.2% to 4.8%.

Consumers in other emerging markets are typically more sensitive to higher oil prices because food and energy make up a larger share of their spending. The central banks of several countries, including Brazil and Russia, have been forced to raise interest rates in recent weeks to combat rising inflation. In Turkey, every $10 increase in oil prices increases the country's current account deficit by more than $4 billion and makes Ankara more dependent on foreign funds to cover the deficit and repay its debt. outside. In South Africa and India, every $10 increase in oil prices causes their current account deficits to increase by 0.5%. Rising fuel prices have also contributed to social unrest in countries like Brazil and Pakistan, where the government responded by raising wages for state employees earlier this year.

Responding to the fuel crisis

Households in the US and other wealthy nations have amassed unprecedented savings during the pandemic that could help them cope with higher gasoline prices. In addition, the increase in shale oil production over the past two decades has made the US a much larger oil producer than it has been in the past. That means American producers, which were hit by the sharp drop in oil prices at the height of the pandemic, are now benefiting.

Besides, the global trend of switching to clean energy sources also helps to reduce the pressure from high oil prices on countries. Approximately 20% of Europe's energy demand came from renewable sources such as wind and solar in 2019, up from 9.6% in 2004. According to the EIA's forecast, By 2050, renewable energy sources (including hydroelectricity) will increase their share and account for 49% of global electricity production. Among renewable energy sources, solar power production will have the fastest growth rate, while hydroelectricity will have the slowest growth rate.

High oil and gas prices caused fuel crises in China, the UK and some other countries, causing widespread power outages and long queues for people to buy gasoline. The UK government has suspended competition law to allow fuel suppliers to share vital information and collaborate more effectively to ensure disruptions in the supply chain are minimized. In addition, the country has deployed the military to participate in supplying gasoline to fuel stations, in order to solve the country's energy crisis.

In recent years, China has been trying to gradually reduce coal power plants. Statistics show that, from 2010 to 2020, the share of coal in China's total energy consumption has decreased by 12.5 percentage points, from 69.2% to 56.7%, while its share clean energy consumption has increased from 13.4% to 24.4%.

So far, however, the country's reliance on fossil fuels for power generation has remained quite large. It is the use of fossil energy to provide electricity that affects the stability of the energy grid in China. This electricity crisis will be a wake-up call for China in its transition to green development with a variety of clean energy with more stable supply to promote economic development.

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