Oil is running out in the EU and the US, a new price increase is expected
World

Oil is running out in the EU and the US, a new price increase is expected

Although the price of crude oil has stabilized in the range of 80 to 90 dollars per barrel in the last two months, the last problem may be the price of oil. The lack of oil appeared not only in the EU, but also in the US, and this will lead to an increase in prices.

Although commodity traders have warned of a high risk of diesel fuel shortages as recently as May, only in the last month have we seen signs of shortages in the EU and the US. Before the war in Ukraine, 15 percent of the oil consumed in the EU was imported from Russia.

There are three sources of fuel price increases in the EU, which over time spread to the US. The first problem has its roots in the pandemic, when many refineries closed or reduced production because the market price was low. This is not only related to oil, but to the entire market of hydrocarbons and their products.

With the sudden drop in demand, it later recovered significantly. After the crash, it was relatively easy to shut down production, both at oil wells and refineries, but it is much harder and more expensive to restart production in the face of a sharp recovery in demand.

Another reason for the increase in the price of oil is related to the increase in the price of natural gas. In 2022, high prices for that energy forced many consumers to switch to diesel, further increasing demand. In the months after the start of the war in Ukraine, oil imports from Russia even increased, in some months by a fifth more than in the same months of previous years.

In addition to being used as a fuel for passenger cars, diesel is also used as the main fuel for transport vehicles, buses and in industry. By 2020, half of the EU’s total oil imports came from Russia, and by early 2022, almost 60 percent.

Strikes in France worsened the situation To make matters worse, French refinery workers began a series of strikes in October, leading to supply problems at gas stations. On October 8, 20.7 percent of gas stations in France had problems supplying drivers with at least one fuel, and a week earlier, almost 30 percent.

The strikes cut refinery output by 60 percent, forcing some gas stations to close and others to wait for hours. The French state had to release strategic reserves as shortages began to spread to industry, especially sugar production.

Unions have been demanding a 10 percent increase because of the rapid rise in the cost of living and the increase in energy company profits. Esso France, a US subsidiary of ExxonMobil, has agreed with unions on a 6.5 percent pay rise in 2023 and a bonus of 3,000 euros. France’s second-largest oil company TotalEnergies has reached an agreement with most of its unions on an average wage increase of 7 percent next year.

The crisis is also spreading in the United States The tremors were quickly felt in the United States. The US Energy Information Administration (EIA) reported that oil inventories are at their lowest level since 2008, with a further downward trend. Although current prices are lower than in June and July, when they ranged from $5.5 to $6 per gallon (4.55 liters), they are rising again ahead of winter.

US refineries permanently cut capacity at the start of the pandemic when demand for fuel fell, while others closed plants to convert them to biofuel refineries. Refinery output has not yet returned to early 2020 levels.

Some refineries are in the middle of regular maintenance or have had unplanned shutdowns, so potential capacity has fallen 9 percent below 2017 levels. The situation is particularly bad on the East Coast, and there are currently just 25 days of supplies across United States. This refers to a situation where production would stop completely, which will not happen, but it illustrates the problem well. By some estimates, oil inventories are the lowest since 1951.

President Biden’s administration has not ruled out a total ban on oil exports, but refiners are against it. The introduction of such a policy would be particularly damaging for the EU, which is struggling to free itself from a decades-long energy dependence on Russia.

The high cost of wrong decisions Although intensive work has been done in the last decade to transition energy from fossil fuels to “green” energy, the consumption of fossil fuels is actually increasing. Not only the consumption of oil and gas has increased, but also coal, which is considered the most harmful source of energy for the environment.

Even environmentally conscious Germany has started to restart old coal-fired power plants since the start of the war in Ukraine, and the public was shocked by the news that part of the wind farm was being demolished to expand a coal mine near the cities. from Cologne and Düsseldorf.

Market movements, which will affect the production, consumption and price of oil, are only part of the bigger story. The energy transition towards renewable energy choices, the poor strategy of this transition, the EU’s dependence on energy sources from Russia, production and consumption interruptions during the pandemic, etc., the situation is chaotic.

However, the EU manages to “disconnect” from the source of hydrocarbons from Russia, this dependence of several decades cannot be returned without consequences. And one of these consequences is the price increase.

Although the drop in the price of crude oil in recent months was expected to put an end to the increase in inflation, the new source of price growth is the problem of refining, production and supply. Crude oil, along with taxes, makes up most of the price of oil, but ultimately the price is determined by supply and demand. Reduction in refinery capacity, strikes and other sources of reduction in refinery production represent a decrease in supply, which leads to an increase in price.

Without a decline in consumption, there will be no long-term decline in prices. And that means energy prices can’t be brought under control without a recession. The choice is still between recession and rising prices. If inflation turns out to be permanent until the end of 2022, the world is in a period of low economic growth with constant price increases.

It will be the first such situation since the 70s, stagflation. So far, there is no sign that inflation is stopping, and GDP growth is just so high that there is no question of a crisis. The economic situation in 2023 could be much worse than a short-term crisis, with the risk of a repeat of the stagflation of the 1970s.