The energy crisis and the Ukraine war have pushed up oil prices. Increasing demand, peak production and a lack of refineries will keep them there for years to come.
Recently, it was a cause for celebration that the prices for the world’s most highly regarded oil types, WTI from the USA and Brent from the North Sea, fell below 100 dollars a barrel again. They are still around 30 percent higher than a year ago and even almost two-thirds higher than before the corona pandemic at the end of January 2020.
The recent surge in prices is even more astounding, given forecasts by European oil majors that the long-term price of black gold will be around $40 to $50 a barrel. Accordingly, the analysts are now coming out who are calculating with much higher oil prices in the future. JP Morgan from the USA shot the bird off with a price of 380 dollars per barrel. However, this only applies to a worst-case scenario in which Russia almost completely stops exporting.
The reasons for the current rise in oil prices are easily explained. First, there is the Ukraine war, which is causing millions of barrels a day to be missing from the world market. Either Russia cannot export them because of the sanctions, or it deliberately withholds them because the military logically has a higher need in times of war. Around one million barrels a day less are currently being exported, which corresponds to around 1.3 percent of average world production. Secondly, apart from Russia, the rest of the production is also lagging behind demand. The OPEC countries delivered about 2.7 million barrels per day less than planned in May. The production gap already adds up to almost 5 percent of global production – every day.
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As consumers, we feel this problem in terms of rising prices, especially for petrol and diesel, but also for all other products that are made from petroleum or have higher transport costs – from plastics to food. Super petrol, for example, has recently become cheaper with the oil price, but still costs around 18 percent more than a year ago on average across Germany. For diesel, the increase is even greater at 42 percent.
However, it seems that we will have to get used to these prices, at least for a few years. Several developments speak against a rapid drop in oil prices.
In the corona pandemic, almost all countries in the world shut down their economies. Accordingly, the demand for oil collapsed. In April 2020 it even went down to negative prices for the first time. Logically, as the pandemic subsided, demand has picked up again, but it will soon surpass pre-Corona levels. The International Energy Agency IEA expects global consumption of 101.6 million barrels per day in 2023. That would be two percent more than in 2019.
This is mainly due to the gigantic economic stimulus programs that countries around the world have launched as a measure against the corona-related economic crisis. Investments are often made in construction projects and infrastructure. However, the huge investments also mean an increased demand for raw materials.
Forecasts by leading oil companies such as BP and Total that the price of oil will fall in the long term also had concrete consequences. As a result, these corporations no longer invested in the development of new oil fields. Globally, the investments of the five largest oil multinationals fell by half between 2013 and 2022 to around 81.7 billion dollars – although a good part of this is still not being invested in new oil fields, but in renewable energies or other business areas.
The fact that OPEC fell well short of its production targets in May was not due to rich producers such as Saudi Arabia and the United Arab Emirates. They are already extracting as much oil from the earth as their countries can. After all, you can make good money with it.
But many oil-producing countries are poor and have been hit hard economically and financially by the corona pandemic. Nigeria, for example, produced even less oil in 2021 than in the Corona year 2020. This was mainly due to the fact that necessary maintenance work could not be carried out and the infrastructure around the oil industry – from roads to pipelines to port terminals – is slowly deteriorating. “Nigeria has yet to benefit from high oil prices,” the World Bank wrote in a May report. The situation is similar in many other oil-producing countries, which can therefore export less oil.
Even where enough oil can still be extracted from the earth, not everything ends up on the world market. After all, the raw material has to be refined before it can be marketed as gasoline, diesel, heavy oil or other products. But in the corona pandemic, many old and inefficient refineries were shut down. In the US, for example, one million fewer barrels of oil can be refined per day than before the pandemic. This leads to the bizarre situation that oil prices have fallen, but fuel prices have risen. After all, the remaining refineries charge well for their service.
Now the world was on its way to moving away from fossil energies like oil and gas and going much more towards solar, wind and similar renewable energies. But the energy crisis is slowing down this development. Many countries, including Germany, have started subsidizing fossil fuels again because of the high fuel and heating prices. In Germany, this is currently happening via the tank discount. There would be little to complain about such short-term interventions by the state, but the money spent on them is simply not available elsewhere to expand renewable energies. Accordingly, oil may play an important role in our lives for longer than previously planned – and demand and prices will remain high as a result.
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