September 27, 2022

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The price of oil is falling

The price of oil has been dropping for weeks, after it has been rising steadily since the start of the pandemic. This may sound like good news, given that rising gasoline and general energy prices are among the main causes of inflation that puts many households in trouble. But it is declining for troubling reasons, which is the prevailing feeling that the global economy is heading for a slowdown or even a recession.

It must be remembered that the price of oil is very sensitive to changes in supply or demand. Restrictions imposed at the beginning of the pandemic have reduced mobility and therefore demand for oil: crude oil prices have fallen so dramatically that on April 20, 2020, the West Texas Intermediate (WTI) price, the reference price for the United States, was introduced, became negative.

These days, it’s still worth less than $100 a barrel: West Texas Intermediate crude has lost 25 percent since the beginning of June, while Brent crude has returned on the 21st to pre-war levels in Ukraine.

It is true that its price However, it is still very high, at levels not seen in years. After the pandemic, the supply of the producing countries did not increase as much as the demand, which made oil a scarce (meaning not circulated) commodity and thus “precious”. It’s something important, of a structural nature, that could remain that way for a long time to come.

It seems that the producing countries have no intention of significantly increasing oil production, ensuring a decrease in its price because in fact there will be more. They do not do this for two reasons: both because such high prices guarantee them large profit margins, and because they do not have the resources to do so. For years, oil has in fact kept a much lower price, and producers have drastically reduced their investment to increase extraction capacity, also in light of countries’ gradual shift toward cleaner, more sustainable energy sources.

In early August, OPEC + (which includes the 13 members of OPEC, the Organization of the Petroleum Exporting Countries, including Saudi Arabia and the United Arab Emirates, as well as other countries such as Russia) establish Almost a slight increase in production, which managed to meet only 0.1 percent of global demand.

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In addition to these structural factors, then, external factors must be taken into account, such as the war in Ukraine and the fact that the West is cutting off Russian oil supplies.

Moreover, there is a purely technical factor. Oil is bought in dollars, which European countries must obtain in exchange for the euro in order to pay for it. The stronger the dollar, the more euro you need to buy a barrel of oil. And that’s exactly what happened: in mid-July, the euro hit Parity with the dollar For the first time in a long time, that is, buying one dollar took one euro. At the beginning of the year it needed 1.15 and even 1.6 in 2008. At that time it was much cheaper to buy oil than it is now.

Just think that when in 2008 the barrel price reached 144 dollars, with the appropriate exchange rate for the euro, the final price in Europe was only 97 euros. Today, the strong euro no longer damped the increases and had the same effect.

– Read also: Because the euro and the dollar have reached parity

Because the price goes down precisely Currently
Since the beginning of June, prices have fallen a lot and for various reasons. One such concern is the possibility of Iran returning to selling its oil production to the West and its allies, but only if the Iranian government succeeds in renegotiating the nuclear agreement with the United States and several European countries, thus removing Western sanctions. (Can supply more than 1 million barrels per day). Talking about the historian 2015 agreement This reduced Iran’s ability to develop the technology to make a nuclear weapon in exchange for the lifting of some international sanctions imposed on the Iranian economy.

The deal was scrapped by then US President Donald Trump, but Iran still retains some elements of it, hoping it can reactivate it once Trump leaves the presidency. The ongoing negotiations turned out to be more difficult than expected, and have come a long way about to fail. But these days things seem to be getting better.

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Some commentators have speculated that the odds of this agreement being successful have greatly increased because of the West he needs of gas and oil to replace what came from Russia. Iran has 16 percent of the world’s gas reserves (second only to Russia) and 9 percent of oil (it is the fourth largest in the world).

However, the most compelling argument for lowering the price of oil relates to growing concerns about a global recession. International Monetary Fund decreased Growth estimates for 2022: In the April forecast, global GDP was expected to grow by 3.2%, now only 2.9. This reflects stunted growth in the world’s three largest economies – the United States, China and the eurozone – with important consequences for the global outlook.

Fears are many and all are justified. In the first place, there is the possibility that the war in Ukraine will last for a long time and lead to the prevention of the sudden flow of gas from Russia to Europe. European Union countries have pledged to cut natural gas consumption by 15 percent, but there is still no common agreement on how to do so and it seems that every country She will do it for herself.

It hasn’t been publicly talked about, and the plans remain somewhat vague, but companies are deeply afraid of the possibility of a forced blockade of their factories. So much so that Confindustria gave it to the government plan Details of possible rationing between industries in the event that gas from Russia does not arrive. This generates a climate of great uncertainty in the coming months.

Then there are concerns about inflation, which may remain elevated for a long time to come. Businesses and families have to deal with very large increases in everything and the governments of many countries are also trying to help to cool down the prices of some goods, such as the food or gasoline.

Central banks then gradually raise interest rates after years. It’s a traditional response to inflation, though somehow the US Federal Reserve and the European Central Bank have acted Completely different. The goal of this measure is to cause prices to fall, but to cause the economy to slow in an open way.

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And then there’s still the coronavirus that’s a threat, especially to the lockdowns in China, which they’re doing Very bad for its economy. China’s GDP, compared to the very rapid pace at which it has grown in recent years, is slowing: lack Supported by the real estate sector, industrial production fell 0.1 percent in July from the previous month, and retail sales fell 0.4 percent from June and 0.7 percent from a year earlier. China is the world’s largest oil importer. Just thinking that it can reduce energy demand leads to lower prices.

What happens to the petrol pump
A lower price for oil can also be seen at the gas station. In Italy, according to the latest survey conducted by the Ministry of Economic Development in the week of August 15, the average price of unleaded gasoline was 1.77 euros per liter, 6 cents lower than the previous week. The difference is similar to diesel, which costs 1.756 euros per liter. Since the end of June, the cost of gasoline has fallen by more than 24 cents per liter, with a drop of almost 12 percent, equivalent to more than 12 euros for a 50-liter tank. On the other hand, diesel fuel is down more than 22 cents per liter, with a drop of 11 percent, which is equal to more than 11 euros to refuel.

It’s not the effect of the 30.5-cent fuel tax and value-added tax cut that the government wants. This reduction has been in effect since March, so prices are already lower, and are currently set to run until September 20.

However, prices are still high: despite the reductions in tax and value-added tax, compared to January of this year, the cost of gasoline increases by 6.5 percent, that is, 5 euros and 55 cents for a full 50-liter tank. Diesel is 14.3 percent more expensive, and 11 euros and 30 cents are needed to refuel.