When oil prices fall, many costs for industry and agriculture, including chemicals and fertilizer, generally follow. And shipping becomes more economical. But when they rise sharply, as they did in 2008 and in the 1970s, they tend to increase other prices and suppress the overall economy. And political fallout often ensues.
Predicting energy prices has always been a fool’s game because there are so many factors, including the expectations of traders who buy and sell fuel, the political fortunes of unstable producing countries like Venezuela, Nigeria and Libya, and the investment decisions of state and private oil company executives.
Today those complexities are particularly difficult to assess.
“(When) Will Oil Bulls Start Revising Forecasts Down?” was the title of a recent Citigroup commodities report. With a global recession “on the horizon,” it said, “which is more likely, a robust hurricane season, seeing prices skyrocketing? A return of Iranian barrels? Or a recession, with oil in the $60s by year-end/early 2023?” If a barrel of oil should drop to $60 a barrel, average gasoline prices in the United States would probably fall at least another dollar a gallon.
But a few days after Citi’s projections, Goldman Sachs Commodities Research predicted a price bounce as fuel demand rebounds. “We see growing tail risks to commodity prices inherent in the scenario of sustained growth, low unemployment and stabilized household purchasing power,” the report concluded.
The war in Ukraine remains a major variable in the worldwide supply outlook since Russia normally supplies one of every 10 barrels of the global 100-million-barrel-a-day market. Since the invasion of Ukraine, daily Russian exports have declined by about 580,000 barrels. European sanctions on Russian oil are expected to tighten somewhat more by February, reducing daily Russian exports by an additional 600,000 barrels.
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And as Russia further tightens its grip on natural gas sales to Europe in tit-for-tat sanctions retaliation, European utilities will be forced to burn more oil to substitute for gas.