An oil at one hundred dollars a barrel, the lace for recovery

oil prices have started this year with an upward trend that has placed the Brent rate at 88 dollars a barrel and to Texas at $85. In both cases, it represents a rise of 13% compared to the end of 2021. However, the increase is 60% compared to the same dates last year.

These increases in oil prices make analysts fear that they will reach the psychological level of 100 dollars a barrel, a level not seen since September 2014. In June of that year it reached 115 dollars.

If that situation were to come, fuel prices would skyrocket -they have already

risen 25% in the last twelve months-, which would cause a sharp increase in the costs of companies and the self-employed, as well as inflation, which closed 2021 at 6.5%.

The increases respond mainly to three factors: On the one hand, the recent missile attacks by Yemeni rebels on the United Arab Emirates, one of the world’s largest oil producers. On the other, the possible EU economic sanctions against Russia if it invades Ukraine, which would include a ban on buying oil from that country. Apart from these geopolitical issues, the fact that the Omicron virus is affecting the economy much less than initially thought is also pulling prices up, which is why world demand for crude oil continues to grow.

“Demand is growing faster than supply”

Elena Días Aguiluz, Professor of Financial Management at Comillas ICADE, He tells ABC that “the demand for crude oil, driven by the economic recovery and the great fiscal and monetary stimuli implemented during the pandemic, is growing much faster than its production. Oil producers are reluctant to increase supply to the same levels as demand due to fear of the appearance of new variants of Covid-19. In turn, investment in production capacity is undermined by the implications that efforts related to the energy transition have for the oil market. This, coupled with the expected rise in interest by central banks, which will raise financing costs, discourages the expansion of crude oil supply.

He adds that the main characteristic of the current oil market “is uncertainty. Under current market conditions, the price of crude oil is expected to continue rising, possibly exceeding $100 a barrel. Of particular interest will be to observe the monetary policy measures of the central banks and the decisions taken by OPEC+ to avoid this price increase. Such high energy prices will be a sure obstacle to economic recovery, further promoting the precariousness and inequality resulting from the pandemic. The central banks, certainly, under their mandate to maintain price stability, will be called upon to raise interest rates with the aim of controlling inflation, which will imply an added difficulty for the recovery.

“Predictably it will be conjunctural”

José Manuel Corrales, Professor of Economics and Business at the European University, underlines that “this rise in oil, together with the general increase in the electricity bill and other energy products, may have a negative impact on the economic recovery and thus weigh down the growth of the GDP of the countries of the developed world (including Spain)».

But this conjunctural increase in the price of oil “predictably will be conjunctural and occurs in a context with very particular situations: the growing optimism about the world economic recovery anticipates an increase in the demand for oil in all countries (this is already a reality in China and India); the substantial cutbacks in the supply of the producing countries because the supply decreases, among other issues, due to the transfer of investments to the green model and due to the long period of low prices; and the dollar remains weak and some investors, who are betting on a return of inflation, have taken refuge in raw materials.

“Therefore, we are facing a rise that is likely to be circumstantial and not structural, so it will probably not be maintained for a long time, unless there are strong geopolitical tensions that favor these price increases. In this sense, we must highlight some clouds, such as the worsening of the energy scenario due to geopolitical tensions, which far from diminishing are getting worse. The main concern comes from the conflict between Russia and Western powers in Ukraine, but also the attack with missiles and drones in the United Arab Emirates, which has reactivated tension in the region.

“Until the third trimester”

Gonzalo Escribano, who directs the Energy and Climate program of the Elcano Royal Institute, explains to this newspaper that “there is quite a bit of volatility in an increasingly high range of prices” and that they will not begin to “flex” until the third or fourth quarter of the year. He does not rule out that they could exceed 100 dollars a barrel, although it will depend on “complicated” geopolitical factors, such as the Middle East and Ukraine. He also points out that “robust growth in demand” is taking place because Ómicron is not affecting economic growth as much.

For Mike Rosenberg, Professor of Strategic Management at IESE, “the economy has returned faster than previously thought”, although the economic recovery could be hampered by the conflict between the Houthis and the United Arab Emirates, as well as if Russia is sanctioned by the EU. He also says that Saudi Arabia needs stable oil prices to carry out its ‘Saudi 2030’ transition to renewables.

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