Having recently driven to Washington, DC and then back to Memphis, the price of gasoline was on the top of my skin-flint mind. I can’t say that I giggled when I filled the tank, but I didn’t curl up in a ball either. With sanctions and commodities markets being used as economic weapons of mass destruction, I felt that pumps ought to be making me scream, instead I more chapped about the price of beef jerky.
Since Russia’s invasion of Ukraine, oil has been weaponized in a way that it hasn’t since World War II; even at the height of the Cold War, the Soviet Union kept the taps to Western Europe open (it was only the non-aligned Arabs chose the use the short-lived “oil weapon.”). A large fire at a US gas plant and labor strikes at oil terminals in France helped to put prices in the stratosphere. The doomsayers piled in, predicting the collapse of energy happy West and starvation in Global South. They were making solid points, they were just wrong.
The why of it lies somewhere on one of those deceptively simple supply & demand graphs that summed up about 90% of what you got out of that undergrad macro-economics course. But where on the graph is the rub.
On the demand side, there is the theory is that with a global economic recession looming, demand has dropped. The great downturn hasn’t happened (yet) and demand, in fact, is at an all-time high in both the US and China. Globally, demand is up. On the supply side, some 20% of the global oil is under Western sanctions, which should be choking supply. And yet, energy prices have dropped off so much that in June OPEC+ announced sweeping cuts in June for members, and then when that didn’t move the price enough, Saudi Arabia announced more voluntary cuts for itself. Such supply side cuts should have jacked up prices. They didn’t.
So what happened? The invasion of Ukraine sent prices soaring, but it didn’t create a global shortage of oil, it just redistributed it. With prices at a premium, production was ramped up in non-OPEC countries looking to cash in and that production has been so high that these new players are scaling back operations, but retaining the spare capacity. All of which erodes OPEC+’s power to set global prices – although the cartel’s ability to stick to its own production quotas was never very good.
Then there is what we might call the black market: This wasn’t really much of a factor until the US over-wielded sanctions as an economic shillelagh. Currently some 20% of the world’s oil comes from countries under Western sanctions – including megaproducers like Russia and Iran – that is being sold at a steep discount – mostly to China.
In an increasingly multi-polar world, both cartels and sanctions are losing the ability to lock prices one way or the other.
Then there are the speculators – energy has always been a good inflation hedge, and when inflation was spooning up into double digits, investors piled in, driving up prices. Now that investors expect inflation to get under control they are looking for other investments.
Will prices stay this low? Almost certainly not. All these global spoilers don’t necessarily spell low prices, just volatile ones. Still, all-time highs in both demand and supply will reach an equilibrium, probably in the fall, with prices higher than they are now, but nothing critical. Then we just wait for the next fresh hell to throw it all up in the air again.