From an average of $71 per barrel in December 2021 to $109 per barrel in May 2022, the benchmark West Texas Intermediate (WTI) crude price has climbed dramatically. Impact of the oil prices increasing on many parties such as consumers, businesses of the US economy.
Why Is The Price Of Oil Rising?
The Russo-Ukrainian War
Russia is the third-largest oil producer in the world, behind Saudi Arabia and the United States.
As a result of Russia’s invasion of Ukraine in late February, this reality was brought into sharp focus. Because of this, the price of crude oil momentarily rose beyond $100 per barrel and eventually reached $120 per barrel a few months later as a result of crushing sanctions put in place by the United States and western allies against Russia.
U.S Oil Production Has Been Slow to Respond
American oil corporations aren’t in a hurry to significantly increase production given the current state of global unpredictability. For instance, the U.S. Energy Information Agency estimates that in May 2022, the country produced 11.5 million barrels of crude oil per day. Despite being 200,000 barrels a day more than a year ago. That is still about 500,000 barrels a day less than in 2019.
Why? Major oil firms, for one, don’t want to spend a lot of money drilling new wells just to watch supply grow, prices fall, and their earnings decrease.
OPEC oil production increased (This helped to decrease oil price)
Making Saudi Arabia and the rest of OPEC expand its oil production has been one of President Joe Biden’s main foreign policy initiatives.
During a visit to the Gulf nation in July 2022, Biden again addressed Saudi authorities directly. At the time, a barrel of oil cost roughly $100 per barrel, and drivers were being crushed at the pump.
Since then, the price of oil has decreased, because Saudi Arabia chose to increase oil production. Instead, economies all throughout the world are worsening:
Impact of the oil prices on the US economy
Impact of the oil prices on consumers
Since most households depend on buying gasoline, the majority of us are likely to consider the price of gasoline when we notice higher oil prices. When gas costs rise, a higher portion of household budgets are likely to go toward paying for it, leaving less money available for other goods and services.
Historically, as gas prices rise, American consumers only gradually cut back on their gasoline usage. This is mainly because the majority of consumers must drive daily to places like work, school, the grocery store, and other locations.
Furthermore, there are no instantly replaceable alternatives. Those who live in densely populated urban areas can use public transportation as an option. Most people do not have the option of switching to an electric or a more fuel-efficient vehicle at the first sign of increasing gas costs. Because of this, the demand for gasoline is said to be price inelastic, which means that as the price of the good rises, the quantity sought declines in percentage terms more slowly.
Higher oil prices decrease consumer confidence. The US Index of Consumer Sentiment is at a current level of 59.90. It has down -16.46% from one year ago.
Impact of the oil prices on businesses
On the other hand, high oil prices raise business expenses. Additionally, these expenses are ultimately transferred to clients and companies. High oil prices can cause increased pricing for goods and services, such as higher taxi rates, more expensive airline tickets, the cost of pears delivered from California, or new furniture shipped from China.
Higher oil prices decrease producer confidence. United States Business Confidence dropped by 19.2 % in Sep 2022, compared with a decrease of 13.8 % YoY in the previous month.
Increases in oil prices are often assumed to lead to higher inflation and slower economic growth. The price of things created with petroleum products directly relates to oil prices in terms of inflation. As was already established, the cost of heating, manufacturing, and transportation are all indirectly impacted by oil prices. Due to manufacturers’ potential to pass along production costs to consumers, the rise in these expenses may have an impact on the prices of a variety of goods and services. How much oil is used in the manufacturing of a certain kind of good or service determines how much higher the price of consumption will be as oil prices rise.
In the year 2022, the USA reported higher inflation after 40 years of history. For every single month, inflation of the country was more than 7 percent when compared with the same period of the last year. According to the IMF forecasts, average USA inflation in 2022 will be 7.7 percent. To read more kindly click here.
Risk of recession
Through their impact on the supply and demand for items other than oil, oil price increases can also restrict the expansion of the economy. Because they raise the cost of production, rising oil prices can reduce the availability of other items. According to economics terminology, high oil prices can cause the supply curve for the commodities and services that use oil as an input to move to the left.
Still USA economy is not in a recession. But this higher oil price can drop USA economy in a recession. “While we do not believe the risk of recession is priced in yet in the oil price, that risk is growing,” Kaneva and others at JPMorgan said in a July report. Oil prices tend to fall in recessions by 30 to 40%, the report said.
To see “What happened in a recession”, kindly click here.
How will be the future oil price?
The US EIA projection for the spot price of Brent crude oil is $93 per barrel (b) in the fourth quarter of 2022 (4Q2022) and $95 per barrel (b) in 2023. Oil prices could rise as a result of potential disruptions to the petroleum supply and slower-than-expected increase in crude oil production.
In our projection, the average retail price of gasoline in the United States is $3.80 per gallon (gal) in 4Q22 and $3.57/gal in 2023. Between 4Q22 and 4Q2023, the average retail price of diesel was $4.86 a gallon.