Oil Inflation and Global Economic Impact

Posted by Philomath Research on November 29th, 2022

Oil prices have increased to nearly $ 100 per barrel which is good for the economic recovery after post lockdown due to the covid –19. As the world is recovering and the economy is growing so there is demand for the oil is also rising. Moreover, due to the rising of geopolitical tensions between the Ukraine and Russia and in the middle east countries which are showing fear to cutoff the oil supply for the world.

Petroleum-based products are a significant source of our country’s GDP. In fact, petroleum accounts for about 3% of GDP and is a huge revenue generator for the Florida economy because petroleum products can be found in almost everything from rubber gloves to chemicals, clothing, plastic wraps and even packaged foods like aspirin all the way down to the fuel we use, even solar panels drew their inspiration from crude oil and gas – this is because oil and gas forms naturally over millions of years from decayed remains and dead things which are under extreme amounts of pressure due to being beneath layers of hard rock.

Oil is used as raw commodity in many good such as:

  • Jet fuel
  • Plastics
  • Petro chemicals
  • Propane cooking gas
  • Asphalt

So, if the oil price rise, then eventually the price of these good will also increase.

Mostly oil is used in transportation, if the price is raised then the goods transported by it eventually must face the rise in the price for transportation which will faced indirectly by the consumer itself.

Rising oil prices

Now, oil is priced at nearly 0 a barrel. Why do oil prices fluctuate so much and what has caused this rise?

In the ever-changing market, no one really has a crystal ball. But there are some key things that will stay constant like change and volatility in the oil market. So, it is probably safe to say that there are three key underlying reasons:

1. Investing cycles are long and capital allocations are conservative, resulting in a limited oil supply

As the price of oil increases, the supply fluctuates. OPEC has brought on additional production slowly to calm the price hike, but they also have limited back-up capacity left and are probably anxious not to overproduce again. Beyond back up capacity, there is not much more that can be done as it takes many years to build up a new infrastructure – some sources require 10 years or more of investment before they’re able to start producing. There are unconventional sources of oil that could possibly help to quench the demand for fuel (like shale oil) but the fact that these are so heavily in demand means that prices will only rise further.

Moreover, all producers are cautious in allocating capital. First, they learned their lessons from an oversupplied market when oil prices dropped to minus a barrel. Second, perhaps even more importantly, some producers maintain that there is strong pressure on the industry not to develop new fields, to hold or decrease investment in maintaining and growing production and to divert the capital towards greener investments instead.

2. Tensions in geopolitics

Geopolitical tensions between Russia and Ukraine and increased instability in the Middle East add to oil market nervousness.

3. Oil demand is soaring because of booming economic growth

When COVID-19 started two years ago, there was a steep decline in global economics. This plunged some oil production rates and significantly limited the ability of producers to adjust their output levels. Since there is only so much that can be reduced without destroying reservoirs or drilling capabilities, storage space itself is also limited. Not to mention that the market was uncertain as to how bad the economic crisis would become and when it would end, compounding factors which drove oil prices down to the lowest bracket seen since the 1970s. At one point oil even dropped dramatically slashing costs by per barrel!

This difficult period lasted for at least five months; in other words it would be about one year overall. It was followed by an economic rebound and a surprising drive for oil and oil products. It is estimated that maybe these things are back to what they were before the pandemic, or almost. In other words, more than ever before. I remember when the pandemic started, there were high expectations that climate change will cause similar energy consumption changes as they did during SARS crisis when people basically had shut down the whole world’s economy to prevent the spread of virus. Indeed, it materialized and overall consumption dropped several percent in 2020. But these gains were short lived, and today it is estimated that potentially higher than what it was before the pandemic after all – particularly carbon dioxide emissions.

What is the effect of oil price increases on inflation and how does it affect the global economy?

Oil is 3% of global GDP. So, if 3% of global GDP was twice as expensive tomorrow, clearly, this would have an impact on inflation. But I don’t think it’s a major driver for inflation when it comes to oil specifically.

In that context, rising oil prices will not be the biggest factor when it comes to inflation, but it is still important. Why? Because oil is basically in so many things, so an increase in price doesn’t impact the volume of goods and services like it does with regular products because most things we use on a daily basis are either oil based or are vastly improved by oil based products even if there may be small traces of it hidden around. Which brings us to the point – an increase in oil prices won’t just affect gas prices at gas stations; it’ll be felt virtually everywhere from grocery stores to restaurants and more! With, how can one prepare for inflation?

Relation of consumers and the oil price.

Let’s talk about the price of oil. As a rule, roughly 40-50% of consumers’ money is spent on government taxation when they buy gas for their cars. There are two important points that come with this figure: firstly, every ¤1.50 spent on a litre (that’s just under ) goes to the supplier and ¤0.30 goes to various global governments; secondly, importing countries like the EU make more from taxing oil than exporting countries from sales! Our service provides the most up-to-date research concerning rising fuel costs along with market analysis detailing who the biggest importers and exporters are for this resource so that you can be in the know about how you can save money along with other relevant data using our product or service!

Oil prices play an important role in determining inflation. A very high rise in prices of oil will affect higher inflation other than it is more dependent on other factors as well –rate of growth, wage growth, spare capacity in the economy.

Impact on oil importers and exporters.

As a result of high oil prices, importers are faced with a challenge, while exporters are benefited. There is really no win-win situation here. Profits are distributed between countries producing and consuming oil because of price changes.

Orderly energy transition

Do rising oil prices create a market for renewables as people seek climate-friendly alternatives?

High oil prices might have a positive impact on the economics of alternative transportation technologies but not necessarily directly equate to increased demand for renewable energy. The economy in general is typically capable of adapting in the face of high commodity prices and this can happen with or without demand flowing positively into alternative solutions for fossil fuel dependence. Consider that as an option for driving down your company’s motor vehicle costs, you may dedicate yourself to adhere to using plug-in electric vehicles, but if your personal goal is really to offset costs from less reliance upon imports of crude oil refined products then spending on your own electrical generation infrastructure as a solution might seem like a much more realistic option.

Well, as they say, you get what you pay for… Cheap oil has been a boon to consumers, but it’s also meant that oil companies have done less exploration over the last few years. This is likely a contributing factor to why EV battery costs have not yet fallen fast enough to make EVs cheaper overall than traditional ICE vehicles. Because there hasn’t been much risk, it’s unlikely we’ll see big, mispriced opportunities in the energy markets around batteries for a while at least. This means there could be more volatility in battery pricing and will certainly limit the opportunity set and potential pie-size for investors into future innovations in sustainable mobility when compared with alternatives during this period of excess capital chasing too few large investment ideas on alternative energy storage solutions.

Conclusion

We hope you enjoyed our article about oil and the energy markets! We are always excited when one of our posts can provide useful information on a topic like this. If you have any other questions or concerns about the energy markets, please contact us anytime at www.philomathresearch.com.  Thank you for reading, we are always excited when one of our posts can provide useful information on a topic like this!

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Philomath Research
Joined: July 29th, 2022
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