Globally, an increase in oil prices could put pressure on the accounts of high-consumption countries like India, Taiwan, Chile, Turkey, Egypt, and Ukraine. Their economies would become more vulnerable to increasing US interest rates.
Dramatic and frequent jumps in oil prices throughout the world have caught everyone off-guard. The skyrocketing oil price is actually a reflection of what is happening across the globe. Oil price continues to surge.
Previously, market observers used to address oil price peaks as seasonal. As per The Balance, “they spiked in the spring, as oil traders anticipated high demand for summer vacation driving. Once demand peaked, prices dropped in the fall and winter.” But this has now changed drastically.
Factors behind Rising Fuel Price
There are a number of factors behind this with US sanctions on Iran being the primary reason. It also includes tensions in the Middle East and demands overriding supply.
In India, the plunging rupee is one of the factors behind the fuel price, and this is steadily increasing oil prices. The Union Petroleum and Natural Gas Minister Dharmendra Pradhan at the Textile and Plastic Investors Conclave in Surat in September had highlighted some external factors. He said “OPEC had promised that it will raise production by one million barrels per day, which was not raised. Crisis in countries like Venezuela and Iran are increasing. There is pressure on oil prices due to a decrease in production. Global currencies have weakened against the US dollar.”
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According to an article in MoneyMorning, Saudi Arabia, OPEC and other large producers including Russia have cut production in a bid to promote the oil price, making the oil market crowded. Russia, the US, and Saudi Arabia are the world’s three biggest oil producers. But news of Libya re-opening four of its export oil terminals has jolted the market.
The Business Report states that “a group of OPEC and non-OPEC producers have been voluntarily withholding supplies since January 2017 to tighten markets, but with crude prices up by more than 40 percent since then and markets significantly tighter, there has been pressure on producers to raise output.”
Moreover, US has now softened on Iran because of political pressures and rocketing oil prices. This just might steer the price downward.
The Winners and the Losers
Last month, the International Energy Association (IEA) warned about a decline in oil exports from Venezuela and Iran. The Guardian reported IEA stating as “If Venezuelan and Iranian exports do continue to fall, markets could tighten and oil prices could rise without offsetting production increases from elsewhere.”
There is no doubt that rising oil prices will negatively impact household incomes and consumer spending throughout the world. Petro Industry News highlighted Europe as vulnerable because many of its nations are oil importers. Meanwhile, closer to home, China is at a high risk since it is the world’s biggest oil importer. Experts have sounded an alarm that US$100 a barrel could trigger a surge in inflation.
“Globally, an increase in oil prices could put pressure on the accounts of high-consumption countries like India, Taiwan, Chile, Turkey, Egypt, and Ukraine.” Their economies would become more vulnerable to increasing US interest rates.
The Petro Industry News further states that major oil-producing nations like Saudi Arabia will emerge as a winner. “Emerging economies like Nigeria and Colombia could also reap the benefits, with an increase in oil revenues helping to repair national budgets and relieve account deficits. This would allow governments to ramp up spending and spark investment”, says The Petro Industry News.
But this is not the end, the IEA has forecasted that by 2025, the average price of a barrel of Brent crude oil will rise to $85.70; and by 2030 it will be $92.82 with ever-growing demand (worldwide). This will surely burn a hole into our wallets.