The market speculates; it’s in its blood. So when fears of a Russian invasion of Ukraine rose fuel prices by more than 15% in January alone, we knew the market was donning its armour, and something big was coming. The global benchmark oil price crossed $90 a barrel for the first time in more than seven years as demand increased drastically in fear of a future supply shock.
Under the pressure of investors and environmental activists, western oil companies are drilling fewer wells than in the pre-pandemic world to restrain the increase in supply. Industry executives are worried that they would repeat their own mistakes from the past in pumping an excess of oil during price surges, to which markets corrected themselves so much that prices collapsed. Elsewhere, in countries like Ecuador, Kazakhstan, and Libya, natural disasters and political turbulence curbed output in recent months.
Regarding demand, much of the world is learning to cope with the pandemic, and people – fed up with the repeated “new normal” – are now eager to shop, make trips, and engage in activity as a whole. Yet, wary of contracting the virus, many choose to drive rather than take public transportation, considerably boosting the need and demand for fuel.
The most immediate and critical factor, however, is geopolitical. The then-potential Russian invasion of Ukraine left speculators in a severe state of uncertainty. They assumed that even if Russian oil shipments were left uninterrupted, the US and its allies could impose trade barriers and sanctions on Russian companies – thereby limiting its access and reducing supply.
The United States and its allies had to prepare for a market condition where production would also be disrupted. Countries like the US, Japan, China, and other European countries all hold crude oil in their strategic reserves. In a condition where supply is disrupted from Russia, the use of these strategic reserves could help if the crises are short-lived. However, there would be dire consequences in the long term as these reserves cannot match the Russian oil supply indefinitely.
Higher oil prices would negatively affect consumers as gasoline would become more expensive, thereby hurting working-class and rural citizens the most. As gasoline, as well as its taxes, are regressive, these energy costs account for a more significant percentage of their incomes, leaving increasing prices to burn holes in their pockets.
However, the economic impacts wouldn’t be as drastic as before, as countries are on a quest to reduce dependency and boost their self-reliance. The US, for example, produces more and imports less oil since 2010, making it a net exporter of fossil fuels as well.
In the current situation, oil prices are expected to fluctuate up and down in the coming period. Eventually, high prices could contract the demand for oil enough that the price mechanism would automatically reallocate resources and reduce oil prices – almost self-correcting. However, this rise in oil price could also incentivise consumers and producers to switch to greener, more sustainable goods and production methods, such as electric vehicles, solar energy, and more, bringing out a more efficient economy in the long run.
