Oil Bounces Back. What Will That Mean for the World?

Global News and Perspectives

Oil is back. If only temporarily

After a year in a slump, crude oil prices have been raising this year – and causing concern around the world. The increase has been particularly steep since things opened up – like factories and other businesses reopened. This doubled the demand for crude oil. With a surge of more than 75 percent since November 2020, the situation is grim especially in countries like India, which import crude to meet most of their domestic demand.

Oil exporters are, needless to say, loving the surge

Countries like Saudi Arabia and Russia have been badly impacted by the pandemic. when a global lockdown drastically cut oil demand. Now that demand is back, they are enjoying the rise.

The increase in the price of crude has led to a rise in petrol and diesel process (governments hate that). These developments are not only influencing businesses but also hitting the common man. In this situation, it is important to understand the current crisis, as well as the international and domestic factors that have resulted in oil prices hike around the world.

Crude oil prices – a roller coaster ride

The last few years have witnessed fluctuations as well as stability in crude oil prices. In 2014 the price of oil had increased sharply. Between 2015 and 2017 however, the oil prices remained consistent. Through the years, the effect of price rise has been felt across different types of crude oils— Brent and West Texas Intermediate (WTI), most significantly. According to statistics the highest surge in Brent oil produced in the Brent oil fields and the North Sea occurred between 2017 and 2018. In June 2017 Brent’s price per barrel was $45, however, by May 2018, the price increased to $80.

In November 2020, WTI was priced at $38.76 per barrel, and Brent stood at $41.19. Moreover, WTI oil prices totalled $25.9 per barrel in 2001 and rose to $93.25 per barrel in 2014, before decreasing to $39.16 per barrel in 2020. In February 2021, the average price of Brent was $58.53 per barrel. The figure was $17 higher than the 2020 annual average. After the launch of the COVID-19 vaccination, the price of Brent per barrel rose to more than the $60 mark.

International and domestic factors

There are many reasons for the recent increase in oil prices. Internationally, controlled oil production is one of them, while domestically surge in excise duties and other taxes is another. Taking cognisance of the increasing demand for oil, many oil-producing and exporting countries have decided to control the production of crude oil to boost oil prices the world over. Saudi Arabia, often acknowledged as the de facto leader of the oil-producing and exporting countries is believed to have cut its daily oil production by 1 million barrels per day to 8.125 million barrels per day through February and March. Meanwhile, supply disruptions from the US have also added to the international reasons for oil hike. This has resulted in the withdrawal of 3.7 million barrel per day, which is the most notable monthly withdrawal since December 2002.

Meanwhile, the final prices that common people pay in their day-to-day lives for usable fuel oils like petrol and diesel derived from crude oil have seen an increase due to domestic reasons. In developing countries like India, there are often domestic policy decisions like increasing taxes that momentously add to the final prices of petrol and diesel. The current increase in the price of auto fuels in such countries is also a result of taxes and excise duties. For instance, in India, after the pandemic hit the country, the government increased the excise duty on petrol to Rs.32.98 per litre from Rs. 19.98. The excise duty on diesel was changed to Rs. 31.83 per litre from Rs.15.83 in the same period. The government increased oil prices to generate more revenue as the medical expenditure had increased immensely during the pandemic.

Future trends

In a period of one-year notable instabilities have made the oil industry a cautious sector to invest in.  While the oil prices fell in April 2020 when the pandemic hit the world, economic recovery is increasing global demand for oil as well as its price. However, to the final consumer, their countries’ policies and taxes have more of an impact on the cost of oil than the global developments. Consequently while in many countries the oil prices have now become equivalent to the pre-pandemic level, in others the cost is record high due to high taxes. In January 2021, the average price of petrol in India was up by 13.6 percent compared to 2020, while for the same period average price surge in the US, China, and Brazil stood at 5.5 percent, 7.5 percent, and 20.6 percent.

Meanwhile, oil prices are expected to rise further. According to reports the Organization Of The Petroleum Exporting Countries (OPEC) members meeting on March 4, 2021, was a catalyst. During the meeting, the OPEC members decided to collectively limit oil production to 1,50,000 barrels per day in April, much less than the required 1.5 million barrels per day to meet the growing demand. The reason for OPEC’s decision is to further increase the price of oil around the world by boosting demand. Moreover, countries like Saudi Arabia remain extremely unpredictable on their production policy, and have sent different messages to other oil producers that may have an impact on oil prices in the coming months.

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