What drives energy prices up?

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Energy prices are skyrocketing around the world, with the cost of oil, natural gas and coal rising rapidly in recent months, shaking up markets and raising concerns about the wider effect on the global recovery from the crisis. pandemic.

Oil prices rose again this week, with West Texas Intermediate (WTI) crude futures, the benchmark of U.S. oil, topped $ 80 on Friday after OPEC and allied producing countries oil companies decided not to increase production and instead stuck with their phased approach to restore reduced production during the pandemic.

The move came amid stronger demand for petroleum products like gasoline and jet fuel as pandemic restrictions recede across the world.

In comparison, a barrel of WTI was worth around $ 40 during the period last year.

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In the wake of the oil rebound, gasoline was more expensive for millions of Americans: On Wednesday, the national average price per gallon of gasoline was $ 3.22, according to AAA – the highest rate since October 2014.

Natural gas prices are also exceptionally high in the UK, Europe and Asia. Fuel shortages led to panic buying and triggered blackouts and long lines at gas stations in China and Britain. (The United States is not spared; on Tuesday, natural gas futures were at their highest level since 2008).

Experts blame a trio of climate change, supply constraints and meager returns on investment for the price hike.

“You combine the three factors and you have the perfect storm in global production that caused a severe supply shock in the energy sector,” RSM US LLP chief economist Joe told FOX Business. Brusuelas.

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The highly contagious delta variant resulted in a labor shortage in the world in general, but particularly in the energy industry, leading to a drop in production which exacerbated the constraints in the supply chain. .

On top of that, returns for investors in the energy sector have been meager in recent years with boom-bust cycles plaguing the sector. A little over a year ago, at the start of the pandemic, there was – $ 30 a barrel in oil prices – the result of crumbling demand.

“Investors who are clearly concerned about the supply shock have started to reassess the effectiveness of forward-looking energy,” Brusuelas said.

In the United States, meanwhile, the industry is facing the early stages of a long-term transition from fossil fuels to renewables, driven in part by American consumers – facing the threat of climate change, which it is forest fires, hurricanes or floods. – “require an evolution of energy”, he declared.

Goldman Sachs analysts have predicted that oil prices could climb $ 10 before the end of the year.

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The price hike sparked some backlash from the Biden administration, which urged OPEC to produce more oil.

“We continue to discuss with international partners, including OPEC, the importance of competitive markets and pricing and to do more to support the recovery,” the press secretary said last week. WhiteHouse, Jen Psaki.

The concern is that a price spike could have the potential to derail the US economic recovery after the pandemic; after all, every dollar consumers spend on gasoline is a dollar they don’t spend on groceries, restaurants, or travel.

But Brusuelas played down the broader economic concerns: Unless oil prices hit $ 125 or $ 135 a barrel, he said, they won’t derail the expansion.

“We have a long way to go before we start to see the bottom in this context,” he said.


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