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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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$100 Oil Is Bad For The Economy (And For OPEC+)

  • Oil prices have risen by 30% since June, largely due to production cuts by Saudi Arabia and Russia, members of OPEC+.
  • Higher oil prices historically decrease gasoline demand; last year, a jump to $110 a barrel resulted in a 4.1% dip in U.S. gasoline demand.
  • Despite short-term projections that the price will stabilize below $100, the potential impacts, especially in developing countries, may have long-term economic repercussions.

Crude oil prices are on the rise, driven by stark cutbacks imposed by Saudi Arabia and Russia, the main forces behind OPEC+. The cuts, implemented by the oil cartel in order to bolster oil prices, have been extremely successful, with barrel prices rising by a whopping 30% since June. Now, prices are hovering ever closer to the USD $100 per barrel mark, and could even surpass that hallowed and feared metric on the back of Russia and Saudi Arabia’s recent announcement that they intend to extend the current voluntary production cuts. Historically, high oil prices have been nothing but good news for the oil industry, even as it causes strife in other sectors. But this time around, it might be too much of a good thing even for Big Oil.

While high oil prices can spell pure profit for the oil sectors, it’s a fine line between stimulus and disincentive, as high prices at the pump can also cause significant dips in demand as the market reels from sticker shock. For example, in June and July of last year, when oil prices hit a blistering USD $110 a barrel average, gasoline demand in the United States plummeted by 4.1% compared to the same period in the previous year when oil was selling at USD $70 per barrel. And as that $110 mark fell, so too did the size of the year-over-year demand gap, underscoring the correlation between high oil prices and consumer reticence. 

And that cooling effect could be even stronger this year, as families in the United States have much fewer savings to fall back on and will likely be operating on a significantly tighter budget. According to the Bank of America Institute, the average savings of U.S. households making $50,000 to $100,000 a year have fallen by half. And that worrying downward trend is about to be exacerbated for millions when student-loan repayments resume next month, representing around $100 billion a month at a national level. 

Indeed, unsurprisingly, the spike in oil prices has caused much hand-wringing over at the Federal Reserve. Rising oil prices were key drivers of recession in the United States in the mid-1970s, as well as the early 1980s and 1990s, as energy markets and prices at the pump “drove up inflation and robbed consumers of purchasing power.” Accordingly, fears of recession are rising in lock-step with crude benchmarks. “Policymakers will be on high alert for a gasoline-driven rise in inflation expectations in particular, as they fear that could lead to a more broad-based increase in prices,” Bloomberg reported this week.

“The run-up in oil prices is at the very tip top of my worries at this point,” Mark Zandi, chief economist at Moody’s Analytics, was quoted by Bloomberg. “Anything over $100 for any length of time, and we’re going to be very sick.” And the oil industry itself is likely not immune to this sickness.

While the state of savings and household economics in the United States is precarious enough, the full impact of consumer drawbacks will be actually felt in developing countries – as usual. Bucking historical trends, the value of the U.S. dollar has only continued to rise along with oil prices, putting a painful squeeze on economies with weaker currencies and lower cash flows that are nonetheless forced to buy dollar-denominated oil. This will have a serious impact on global economics and energy markets, as these developing countries include the monster markets of India and China. 

While the USD $100 mark is not significantly financially distinct from, say, a USD $99 per barrel mark, three digits have an outsized psychological influence on consumers and on the energy market as a whole. Crossing that line will therefore cause disproportionate shockwaves to a strapped and fragile global market that the energy industry should be prepared for in the coming months. Luckily, most experts are predicting that the foray into triple digits will be short lived, but the damage done will likely have a longer shelf life. 

By Haley Zaremba for Oilprice.com

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Leave a comment
  • Alex Petrovic on September 27 2023 said:
    100$ oil is great for mineral rights owners ????.
  • George Doolittle on September 27 2023 said:
    The USA economy barely even needs the internal combustion engine at the moment. Tesla will not be playing small ball with the Cybertruck by way of specific example. Long $meoh Methanex strong buy
  • DoRight Deikins on September 27 2023 said:
    As some experts predict the demise of the dollar, some countries are going the other way, making it their national currency. As far as I know, El Salvador is the latest, and it looks to be a wise move - since much of its GNP and energy costs are determined by its big brother to the north. Argentina is making noise about making the US dollar as its fiat currency. Though it seems like a tough sell since it seems to be all in with BRICS.
  • Anders Christensen on September 28 2023 said:
    Looking at the math 110$ is much better business than higher demand at 70$.

    This time it is not about the money for OPEC+ it’s about crushing the west and especially about crushing Biden and his merry followers ending western hegemony.

    Remember Biden being humiliated when going to Saudi begging for cheaper oil ?

    India and China and the poor global south will get discounts while the west will die in hyper inflation.
  • Mamdouh Salameh on September 28 2023 said:
    Nothing of that sort. While it is true that oil prices at $100 a barrel or higher raise the cost of manufacturing affecting costs of living, they also have great benefits for the global economy.

    A fair price for Brent crude ranges from $100-$110. Such a range provides the following benefits:

    1- It stimulates the global economy and expands its activities thus creating employment opportunities for millions of people and attracting more investments.

    2- It enhances global investments in the exploration and development of oil resources and also in the expansion of production capacity thus eventually leading to lower prices.

    3- It rewards producers like OPEC+ whose overwhelming majority of members needs prices ranging from $90-$100 to balance their budgets. This will enable them to invest in capacity expansion and the diversification of their economies.

    4- It also rewards the global oil industry enabling it to invest more in oil and gas, reward its shareholders and investors and create more employment opportunities within the industry.

    In a nutshell, the collective benefits for the global economy far outweigh the rising costs of manufacturing and costs of living.

    Having said that I accept that higher oil prices do affect countries differently. For instance the China-led Asia-Pacific region where the economies are vibrant and growing fast with inflation is minuscule, they can absorb the price rise far easier than in the United States and the EU where growth is hovering just above zero and inflation is still high.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert
  • Gloria Martha on September 28 2023 said:
    very good

Leave a comment




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