High oil prices are a pressing issue for everyone from industry titans to the every-day

American. It is not only instrumental for  personal transportation but finds itself facilitating the transportation for goods and services in almost every part of modern life  A number of issues are causing oil prices to spike right now: the day Russia invaded Ukraine, the price jumped from around $90 to $105 per barrel of crude oil (Kelly 2022). The largest jump has been to around $130 bbl on March 6th, 2022, but most of those gains were quickly lost. Right now we are hovering around $100 bbl. What are the main contributors and impacts of these huge spikes in oil prices?

First, we can examine simple economics: supply and demand. In 2020, OPEC+ cut production of oil as COVID-19 touched every corner of  the world and slashed demand (Domonoske 2022). It is a slow process to restore output, both for technological and economic reasons. Technologically, restarting oil production that has been shut down requires bringing a new rig, drilling the cement plug, and pumping sludge blocking the wellhead. From an economic standpoint,  less oil produced boosts prices, which appeals to financiers of publicly owned companies (Domonoske 2022). Therefore, the limited supply is contributing to increasing prices. There are some positive events on the horizon that may lower prices and lessen supply issues. Politicians can try to put more pressure on OPEC+ to produce more, and with time, some countries that are struggling technologically will catch up. Additionally, if the attempt to revive the 2015 Iran Nuclear Deal is successful and sanctions are lifted, a lot of Iranian oil would hit the market and probably lower prices (DeYoung 2022). Europe primarily relies on Russia for oil, so while there are possible future solutions, for now, they must lean on the United States and look to new markets for oil, such as Qatar. Everyone is looking for oil at the moment, so Europe will be hard-pressed to find it and keep prices from jumping even higher.

Meanwhile, demand is skyrocketing. As COVID-19 cases drop and restrictions are being relaxed, people want to travel and take advantage of in-person activities again (Kaiser 2022). With a tumultuous and cold winter, heating needs pushed up demand for oil as well (Krauss 2022). Suppliers are well aware of the winter needs and the restrictions dropping. Part of the reason they are reluctant to raise production to meet this demand is fear that when spring comes or if a new, worse variant arises, prices will plummet. Cases shot up to 6,300 in Shanghai, leading to a city-wide lockdown for mass testing. Meanwhile, temperatures have been rising as spring begins. These both provide some evidence that the reluctance to raise production may be warranted. In short, demand is still on the rise and supply simply cannot meet it in the current conditions. This, in turn, has pushed up the price of oil.

Next, we can look at the Russia-Ukraine crisis and its impact on oil prices. Russia invaded Ukraine on February 24th, after weeks of cyber-attacks and military exercises on the border. The following day, they attacked the capital, Kyiv, resulting in an estimated 137 people killed and 100,000 civilians displaced (WSJ 2022). NATO responded by imposing harsh sanctions against Russia. However, none of these sanctions targeted the energy sector (Kelly 2022). The United States banned oil imports from Russia on March 8th, 2022, but fellow NATO members were unable to take that step. Russia is the second-largest global gas supplier, accounting for about 10% of global oil (Raymond 2022). A lot of the Russian oil-exporting is concentrated in Europe, which is why the U.S. is able to take this step while other nations have not imposed sanctions on energy. Uncertainty is the biggest element here. If Russia takes any actions against NATO countries, harsher sanctions will be placed on them. Alternatively, Russia could retaliate against current sanctions by limiting oil exports. Already, Germany is feeling the repercussions as they had to shut down the $11 billion Nord Stream 2 pipeline; an act which the main lobby organization representing German industry warned would “threaten to crush the economy” (Eddy 2022). Europe is already feeling the sting with rapidly rising gas prices, and industry impact should start to show soon. Overall, the high prices right now reflect the geopolitical uncertainty. We simply cannot know the actions Russia will take or how NATO will respond.

Finally, we can address the impact of oil prices on inflation in the general market. Oil prices and inflation are correlated, so as oil prices go up, inflation often follows (Lioudis 2022). That is not to say, however, that oil prices are the only or even the primary cause of inflation -  they are not. Supply chain issues and intense growth of the economy as we bounce back from COVID are massive contributors to inflation (Stewart 2022). Gas prices affect not only personal gas consumption for cars but also electricity for heating/cooling and transportation for a plethora of goods. Gas prices, therefore, seep into the cost of transporting almost all goods. Higher gas prices cut into spending in other facets of life and business, which could dampen GDP (Stewart 2022). Therefore, the gas prices rising will only make inflation worse, at a time when it is the highest it has been in 40 years. The federal reserve has tough decisions to make in terms of raising interest rates while balancing the factors of inflation, the oil crisis, and the Russia-Ukraine war.

As of April 3rd, 2022 in Middletown, it costs roughly $3.77 a gallon to fill up your car. This is up from the U.S. average of $2.79 last year. Supply, demand, and geopolitical factors have driven up the price, and it will presumably continue to increase before they  stabilize with any sort of certainty. There are a few things that may prove themself productive, however, like the possibility of the Iran deal, supply chain issues clearing up, and the changing of seasons  bringing a less expensive electricity bill, but as of now oil prices are uncertain and trending upwards. Additionally, this gas crisis brings up a few important questions. Will countries start to question the global economy after getting slammed by supply chain issues and oil price jumps stemming from geopolitical uncertainty? More importantly, will this cause countries to start trying to produce more individually and lead to protectionist policies? That may be extreme, but I do believe that the recent world events will cause politicians to look with a more critical lens at the globalized world (perhaps evidenced by measures like the Biden-Harris Plan to revitalize American Manufacturing). The second question that arises is what is the future of energy? Perhaps in the more distant future, electric vehicles will help people deal with fluctuating gas prices. Electric vehicles have a higher upfront cost, but cheaper operating expenses, with drivers spending 60% less on fuel (Winters 2022). Biden has pledged 500,000 new charging stations by 2030 and tax credits for owning electric vehicles. While the technology and availability of electric cars, which are also impacted by supply issues like the microchip shortage, are still developing, perhaps in the future personal gas consumption will be less perilous.

Oil prices are notoriously volatile, especially in times of crisis. By the time you read this article, the prices will be different. However, understanding the current geopolitical issues impacting price and how the price of oil translates to inflation is critical to understanding the current economic environment.

Sources:

Kelly, Stephanie. “Oil Tops $105/Bbl after Russia Attacks Ukraine.” Reuters. Thomson Reuters, February 24, 2022. https://www.reuters.com/business/energy/oil-rises-us-says-russian-attack-ukraine-may-occur-soon-2022-02-24/. 

Domonoske, Camila. “Oil Prices Are Surging toward $100 a Barrel. Here's What That Means for You.” NPR. NPR, February 22, 2022. https://www.npr.org/2022/02/22/1081092765/oil-gas-prices-100-barrel-ukraine-russia. 

DeYoung, Karen. “Negotiations over the Iran Nuclear Deal Are Close to the End, and a Deal Appears Possible.” The Washington Post. WP Company, February 23, 2022. https://www.washingtonpost.com/national-security/2022/02/23/iran-us-nuclear-deal/. 

“Mask Mandates Dropped in Every State but One; More Cities Relax Rules.” Kaiser Health News, February 23, 2022. https://khn.org/morning-breakout/mask-mandates-dropped-in-every-state-but-one-more-cities-relax-rules/. 

Krauss, Clifford. “Why Are Oil Prices so High and Will They Stay That Way?” The New York Times. The New York Times, February 2, 2022. https://www.nytimes.com/2022/02/02/business/economy/oil-price.html. 

“The Russia-Ukraine War: Latest News.” The Wall Street Journal. Dow Jones & Company. Accessed February 25, 2022. https://www.wsj.com/livecoverage/russia-ukraine-latest-news?mod=article_inline. 

Raymond, Jonathan. “How Russia's Invasion of Ukraine Could Impact Gas Prices.” 11Alive.com, February 24, 2022. https://www.11alive.com/article/money/consumer/russia-ukraine-invasion-gas-price-impact/85-52a3ca40-96d4-443e-8234-b5eb1a95edc9. 

Lioudis, Nick. “What Is the Relationship between Oil Prices and Inflation?” Investopedia. Investopedia, February 8, 2022. https://www.investopedia.com/ask/answers/06/oilpricesinflation.asp.