Session 6/7, the world oil price breached the 100 USD/barrel mark for the first time since April, raising hope among politicians, business owners and drivers around the world that the days The towering fuel prices may be coming to an end.
But unfortunately that day cannot come soon, according to Bloomberg. The fundamentals of supply and demand in the market suggest that oil prices will stay high for many months, even years.
Fuel demand is still growing strongly in the context that the world has just come out of the Covid-19 pandemic and reopened. Not only that, we don’t have enough refineries to turn oil into gasoline. The world’s biggest oil companies are trying to break down barriers that prevent them from increasing capacity. And it is impossible not to mention the tensions in Ukraine that made Russian President Vladimir Putin decide to reduce gas exports to Europe.
Forecast of world oil demand by IEA (bpd)
“The world has never seen such an energy crisis as large, in all respects. The whole world is affected,” Fatih Birol, head of the International Energy Agency IEA said at a conference. event on 12/7. Worse, he reckons the worst is yet to come.
The impact of high oil prices on the international political and economic picture is enormous. In the US, gasoline prices have risen 42 percent year-to-date, sending inflation soaring to its highest level in more than 40 years. High gasoline prices are also one of the reasons why Democrats are at a disadvantage and are at risk of Republicans regaining control of Congress in the midterm elections later this year. From Peru to Sri Lanka, rising fuel prices cause social unrest. The clean energy revolution that world leaders have hotly debated in recent years is now in danger of being pushed aside because of the risk of energy shortages.
In the spring of 2020, the Covid-19 pandemic broke out and pushed energy demand to its lowest level in decades. Oil prices even fell below zero. But at the moment everything has completely reversed. According to the IEA’s prediction, by 2023 the total amount of oil consumed by the world will surpass the pre-epidemic level.
It will take a long time for supply to catch up. In a report last month, JPMorgan Chase painted the prospect of oil prices soaring to $380 if Russia decided to remove millions of barrels of oil from the market. Although Russia has found alternative customers in China and India, Russia’s total production has fallen by more than 1 million barrels per day due to the impact of sanctions and many countries are afraid of their partner Moscow.
It is difficult to find a supply strong enough to replace Russia. OPEC, which produces about 40% of the world’s total crude oil, is struggling to meet its output target. Deteriorating infrastructure, years of declining investment and political instability are the reasons for the decline in output. In May, OPEC+ production fell by 2.7 million barrels per day from the target.
Hope for supply from OPEC is placed on two members that currently have excess capacity: Saudi Arabia and the UAE. In an effort to increase supply to help cool oil prices, US President Joe Biden is planning to visit Saudi Arabia and meet Crown Prince Mohammed bin Salman – whom he has previously refused to talk to, including by phone phone. But it remains unclear how far Saudi Arabia and the UAE can increase production. Oil and gas group Aramco claims it can produce 12 million barrels per day, but in fact, they have only achieved that number once.
French President Emmanuel Macron was told by the UAE leader at a G7 meeting that the UAE is currently at maximum capacity.
There is no sign that the US shale industry is ready to save the world. It is true that mining activity in Texas and New Mexico is getting busier. But the rest of the US oil industry is in a state of stagnation. Total daily US production is still 1 million barrels lower than before the epidemic.
The problem isn’t just oil companies that can’t produce more oil. Some don’t even want to. The world’s five largest oil companies plan to invest a total of $81.7 billion this year, just half of what they spent in 2013. U.S. shale companies have been trying to. trying to tighten spending after years of “burning money” without much effect. In Europe, large corporations are shifting from oil to cleaner energies.
Besides, there are bottlenecks in the oil refining industry. The pandemic has forced aging and inefficient companies to close, leaving the world so starved of supply that the price of crude oil is no longer an accurate measure of the price consumers pay. For example, last month the price of oil in the US fell 13% but the price of gasoline fell only 6.5%.
Again, this is a story of supply-demand imbalance due to a sudden spike in demand. After 2 years of all kinds of restrictions because of Covid, the demand for travel both by road and by air has spiked, almost returning to pre-epidemic levels. A wave of interest rate hikes and fears of a global recession will reduce demand, but history shows that economic downturns rarely cause a sharp drop in fuel consumption.
Some argue that high oil prices will push the world away from fossil fuels faster. However, the transition to clean energy is facing many obstacles. In the current difficult situation, even the countries that set the most ambitious goals on climate change tend to spend billions of dollars to keep traditional fuels cheap. According to statistics from Bloomberg, more than 20 countries have applied price subsidies to contain the increase in gasoline prices.
Because expensive gasoline has a huge impact on inflation, and that puts upward pressure on interest rates, renewable energy companies are facing rising capital costs. 20 million electric cars worldwide are not enough to quench the thirst for fuel. It is estimated that by 2027, the demand for crude oil used in road transport will peak
In a recent report, Citigroup optimistically forecast that oil prices could drop to $65/barrel if the world economy is in recession. According to the bank, oil demand only declines in the worst recessions, but oil prices will fall in every recession.
However, on July 8, Russian President Putin warned the opposite. He believes that the West has made a mistake by embargoing Russian oil. If this continues, the global energy market will face “more severe, even dire, consequences”.
Refer to Bloomberg
Source: Vietnam Insider