Consumers have been feeling it at the pump lately, with the price of crude oil soaring in recent weeks to the highest levels seen since 2014. Just in the last few weeks, oil prices have climbed a whopping 22%, so why are oil prices so high all of a sudden? There are a number of factors at play, but the key pieces driving prices up are the Russian war in Ukraine and a growing disparity between global supply and demand. In this article, we dive into the root causes of oil prices being so high, what it all means for you, and what we can expect to happen next.
Why are oil prices so high?
When the coronavirus pandemic hit in 2020, the global demand for oil was decimated by lockdowns and closed borders. People worked from home, businesses closed, and travel came nearly to a halt. In fact, it was the first time in history that the U.S. benchmark oil price ever went below zero after a spat in April 2020 between Russia and Saudi Arabia over proposed cuts in response to the pandemic. However, prices have dramatically recovered since then and at a much faster rate than expected largely due to the global oil supply not keeping up with overall demand.
While the Biden administration said in November of 2021 that it would release 50 million barrels of oil from the country’s strategic reserves to help relieve the pressure of prices on consumers, that move has not been successful in making a difference. On top of that, Russia’s war in Ukraine has exacerbated this situation as the U.S. and its western allies imposed crippling sanctions.
To put this into perspective, Russia currently makes up around 11% of the world’s global oil production as seen in the image below. Additionally, Russia represented about 8% of all U.S.-bound crude shipments up until recently. However, since Putin’s invasion of Ukraine, big energy giants like Shell, BP, and Exxon have all stopped future operations in Russia while the Biden administration announced bans on Russian oil and petroleum product imports.
What we are seeing now with the Russia-Ukraine crisis has caused massive disruption to global oil supply forecasts, which all play a key role in how oil gets priced globally today. Additionally, as most of the world has emerged from the pandemic and found a new “normal,” demand for oil has recovered back to pre-pandemic highs, all while global oil supply hasn’t kept up, leading to the high oil prices we’re seeing today.
What this means for you.
Higher oil prices affect every facet of the global economy, which ultimately affects you. Not only do you pay more when you fill up at the pump, but you pay more at the grocery store to account for the increased costs of transporting the food you buy from the store.
Your plane tickets to go to Hawaii for vacation cost more to cover the higher cost of jet fuel. Increased oil prices cause increased inflation and less purchasing power for every dollar you spend. Ultimately, you have to find ways to combat the reduced purchasing power by either spending less or earning more.
What we could see next.
With Russia out of the picture, crude oil and refined product inventories low, and consumption demand high, the Biden administration has called on the Organization of Petroleum Exporting Countries (OPEC) and its allies to produce more oil, but the call to action has been slow to materialize.
For example, Saudia Arabia – which is OPEC’s most important member – has mentioned they have no plans to increase their production. In the U.S., oil producers are also in a similar boat, citing their worries around investing heavily in new wells only to see supply increase, prices decline, and their profits pushed down in the process.
Only time will tell how quickly supply will catch up to demand. We’ve seen spikes in oil prices in the past, but also plenty of equilibrium in between. The situation is likely to continue to get worse before it gets any better, so fasten your seatbelts and be prepared for some continued turbulence along the way.
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