The stock market has been awful through the summer of 2022 – declining in January, February, April, May, and June, with just the month of March recording positive numbers. Naturally, these declines and the accompanying volatility make investors nervous. At the center of this volatility has been the price of oil. Since early 2022, a barrel has consistently remained north of $100/barrel.

The Price – Supply and Demand

Why does the price of oil change so much? The price is affected by many factors and uncertainties. The weather, transportation costs (via ship, truck, pipeline, etc.), and taxes also play a significant role in prices.

The oil market has been uncertain for several reasons. When the U.S. was ramping up production, the price dropped, followed by a drop in production.  When oil producers make less money, they cut back dramatically on drilling and sharply reduce spending on exploration and production. Remember in 2014 and 2015 when many U.S. petroleum companies went bankrupt, causing thousands of employees to lose their jobs?

In its simplest terms, it is about supply and demand. But the supply side is not as easy to influence. Take the shale oil industry in North America, for example. Even if the entire industry decided they wanted to crank up production to increase the supply to bring prices down, it is still a 12 -18 month process. And besides the current price, there are very few incentives (and arguably several risks given the current political climate) for any producers to take on the expense of trying to speed that process up.

International factors also influence the price. Oil producers have been concerned about the Russia/Ukraine conflict, the health of the massive Chinese economy – with its high oil demand – and tensions in the Middle East, among other things. These geopolitical tensions add to the uncertainty.

Russia Does Matter

From a research paper published by the Conference Board earlier this year: While Russia’s economy only accounts for 3 percent of global GDP, its crude oil production constitutes 12 percent of the world total. Russia’s economy is only about the size of the state of New York, but it punches well above its weight in energy production. Russia accounts for 12 percent of global crude oil production. Much of that production is shipped overseas, making Russia the second largest exporter after Saudi Arabia.

Of the 12 million barrels per day of crude oil Russia produced in 2019, 29% was consumed domestically. The remaining 8 million barrels per day were exported–primarily to European and Asian markets. In 2021, before Russia invaded Ukraine, OECD Europe consumed nearly half of Russian exports, and China consumed one-third. The remaining sixth was used in other parts of the world–with the US accounting for just 4 percent.

Oil Prices and Gasoline Prices

In a more practical sense, how does the price of oil affect the cost of gasoline? Pretty directly. Any change in the price of a barrel directly affects the price of a gallon of gas.

A barrel of crude oil holds 42 gallons. From this barrel will come about 12 gallons of diesel fuel, 4 gallons of jet fuel, smaller amounts of propane, asphalt, motor oil, and various lubricants, along with about 19 gallons of gasoline. So it takes a barrel, on average, to come up with about 1.5 tankfuls of gas in your non-diesel car.

Considering all the oil products, each person in the U.S. consumes an average of about 2.5 gallons of crude oil per day, according to the Department of Energy. As a result, the price of a barrel of oil affects us beyond the pump.

Back in March, analysts cited by National Public Radio projected that if oil hit $200/barrel, then the retail price of gas would average $5.84. That seems like a very low estimate, given that the average gas price is around $5/gallon, with oil hovering just over $100/barrel.

If Oil Hits $200 or $250

If the price skyrockets to $200 or $250/barrel, the impact on virtually every aspect of the global economy, global markets, and your investments would be significant, pushing the global economy into stagflation. Here in the United States, according to Bank of America estimates, oil prices at $100/barrel reduce US GDP growth in the year ahead by 1%. At $200/barrel, the negative impact on economic growth is, estimated to be 2%.

 

Source: conference-board.org Copyright © 2022 FMeX. All rights reserved. Distributed by Financial Media Exchange.
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