In case you didn’t notice, the price of oil has been moving higher, and it shows no signs of coming back down any time soon. In late January, a barrel of crude topped $65, a gain of approximately 50 percent since its low in June 2017. Of course, higher oil prices mean fewer dollars in our wallets, but the impact could extend well beyond this. Analysts are warning that if oil prices continue to rise, growth in the U.S. and other economies could not only slow but be derailed entirely.
Wall Street is certainly aware of this trend. JP Morgan and Barclays predict even higher oil prices over the next 12 months. Goldman Sachs thinks oil is going to be $82.
Morgan Stanley has begun warning about “upside risks” in inflation, because higher energy prices are passed along and generate higher prices for many goods and services. Even worse, rising inflation could pressure banks to raise interest rates, a move that could hurt businesses, consumers, sales of homes, stocks, and bonds.
Signs of higher inflation are already showing up. According to 24/7 Wall Street, retail gasoline prices in late January rose to a national average of $2.58, an increase of more than three cents from the previous week and the highest level in more than four months. A gallon of gas in Queens cost more than $2.70.
Motorists Are Muttering
But New Yorkers were not the only ones starting to mutter when they filled their tanks. Forty-eight of the 50 states saw higher gasoline prices in late January, with prices up on average nine cents in a month. By comparison, a gallon was 30 cents higher than it was a year ago.
Forty-eight of the fifty states saw higher gasoline prices
in late January, with prices up on average nine cents in a month
Patrick DeHaan, head of petroleum analysis at Boston-based GasBuddy, a firm that monitors fuel prices across the U.S., expects a gallon to increase to the $4 range in California by Memorial Day. This would be the first time gasoline in California topped $4/gallon since July 2014.
Things could really get interesting after Memorial Day, the traditional start of the demand-heavy summer driving season. “We are in February, when demand for gasoline is at the lowest point of the year,” DeHaan said. “The concern is that the year ahead will have a much higher floor than what we saw last year.”
Get Used To Higher Oil?
An important reason why gasoline is becoming more expensive is the surging price of crude. Oil is now trading in the mid-60s, the highest point in nearly three years. And an improving world economy is expected to keep driving the price upward. JP Morgan analyst Abhishek G. Deshpande predicts continued economic growth will boost demand from the current world total of 98.6 million barrels per day to 101.1 million barrels by the end of the year.
At the same time that demand for oil has been increasing, inventories of crude have dropped by almost 77 million barrels. Inventories fell steadily from mid-November to late January – a record 10 consecutive weeks. Political and economic problems are also holding down production in Venezuela, once an oil powerhouse.
Like all other commodities, the price of oil fluctuates, sometimes sharply. In this sense, higher oil prices are not surprising. But what about going forward? Will the price continue to rise?
To answer this question, analysts, both armchair and professional, will certainly mull this fact: Explorers in 2017 discovered the least amount of oil since at least the 1940s, according to Rystad Energy, an oil and gas consulting firm. Less than seven billion barrels were discovered, a surprisingly low amount. And while some companies will announce discoveries they made in 2017 later this year, Rystad believes that this will increase the total amount of oil discovered by just 10 percent – at most.
And 2017 was no fluke. New discoveries have fallen every year since 2014. Perhaps more important is that explorers are consistently finding less oil in the fields they are discovering. According to Rystad, an average offshore discovery contained about 100 million barrels of oil and equivalent, down from the average of 150 million barrels in 2012. These developments have prompted the head of the International Energy Agency (IEA) to warn of a possible world oil shortage as soon as 2020.
Call Out The Reserves
The last time oil and gas companies added to their reserves by as much as they were producing was back in 2006. Then the numbers began going down. In 2012, only 50 percent of the reserves companies were using were being replaced. And last year, just 11 percent of their reserves were being replaced.
This doesn’t mean the world is about to run out of oil. Major oil-producing companies have emergency reserves; also, higher prices will encourage additional exploration, which may result in new discoveries.
And some important discoveries were made in 2017. A 1.2-billion-barrel field was discovered in Alaska, the largest discovery in the U.S. in at least three decades. At least two billion-barrel fields were found in Mexico, and there were some others in Latin America. There was also a major find in Texas.
Nevertheless, the number of major new fields being discovered have been declining steadily for years. It’s important to keep in mind that a field with a billion barrels of oil is not as significant as it sounds – a billion barrels is enough to supply the world with oil for just 10 days. Also, even if dramatic new energy-producing technologies may be developed, oil will remain the premier source of energy for many years.
What all this means is that the world is not in danger of running out of oil any time soon. But if major new oil finds are not made, over the long term the world could be facing a serious supply shortage, and this could lead to much higher oil prices and much higher inflation. If this scenario materializes, the prices we’re paying for oil and gasoline now will seem like child’s play compared to the prices we will see.
Gerald Harris is a financial and feature writer. Gerald can be reached at firstname.lastname@example.org