Just Why Are Oil Prices So Darned High?

What is the real reason behind record-high fuel prices? Automologist MAC elaborates…

Traditionally, oil prices become volatile during times of conflict, especially if the protagonists include the world’s largest exporter of oil products. But is Putin’s excursion into Ukraine the real cause of high global oil prices?

World energy prices are going crazy. Record prices at the pumps are being experienced in just about every country around the globe as the cost of crude goes through the roof. You may think that this is all about Putin’s army’s current tour of Ukraine, but this is really only a part of the story. Oil prices have been rising almost inexorably since the start of the “post-pandemic” era. Since Putin started using his neighbour’s garden to park some of his military hardware, real prices have only increased about 10%.

What is probably stranger is that despite all of the rhetoric coming from world governments about hitting Putin where it hurts and giving him a swift kick in his barrels, the oil keeps flowing out of Russia in ever-increasing amounts. Yes, Russian production and exports of crude oil have actually increased since February! At this time, I believe that only the UK and USA have taken direct action to stop imports of Russian oil. You may have heard that all European nations are aiming to ‘phase’ it out over the course of the year(s) but this means for now they are still deeply dependent on it, particularly the gas.

Even more interesting is the little-known fact that 40% of Russia’s gas flows through Ukraine, including gas from the annexed Ukrainian territory of Crimea, and this has not been stopped either by Ukraine, Europe or Russia. OPEC has, of course, stated that they will turn the tap on but they are presently actually producing about 800,000 bpd less than their target and why not? They are currently getting a lot more for less.

So, there is no shortage? Well yes and no. After 2020, prices started to rise rapidly for a number of reasons, which include events such as the cancellation of the Keystone Pipeline (thank you, Americaland and Uncle Joe), very tight production caps introduced by OPEC+ all tied up with a post-pandemic surge in demand greater than was expected. These were just some of the reasons for a ‘tight market’. All the Russian invasion did was give the speculators a chance to ramp the prices up even more.
Squeezing Russian exports will probably do more to help Iran and Venezuela than harm Russia where (as I said above) production has actually risen since the imposition of sanctions.

Russian oil is currently selling well below the price of benchmark crudes like “West Texas Light” and of course, we all know that sufficiently discounted crude oil will always find a market. Even though the UK and Americaland have banned Russian oil and refined products, the likes of China and the EU and even Japan are still readily buying their products. Some countries will actually benefit by buying more. For example, India currently imports about 180,000 barrels of Russian crude per day. Rumours are that at the discounted pricing, this will rise to about 500,000 barrels a day in April.

So, bad political decisions in the US of A coupled with higher demand for oil than expected and a failure of OPEC+ (the plus is basically Russia) to increase production to a commensurate level all contributed to the problem and drove prices to new dizzying heights? No, not really. It is global oil traders who have upped the price. Yes, you may blame politicians or greedy oil barons for high prices, but it is not really them who set the prices. They are set by commodity brokers in places like New York, London and Singapore.

Prices had been escalating for at least a year. Against this backdrop, Russia invaded Ukraine and the traders got cold feet and bid the prices even higher. There is no real shortage of oil, just a perceived danger that there may be. Will the prices ever go down? Well, yes, once everyone realises that there is plenty to go around and the US opens up shale oil production, then yes. Yes, they will go down. Until then, get used to higher prices at the pumps.