Stepping on the gas
Oil prices are up now, but surge might be short-term
Oil prices have jumped by about one-third since the summer on signs of stronger economic growth around the world and fear of instability in the Middle East.
So far, however, the run-up isn’t setting off alarm bells. Prices remain far below their 2014 peaks. And U.S. producers are pumping at a record rate, leading some experts to bet the higher prices won’t last long.
At midday Monday, Brent crude, the benchmark international price, was down 27 cents to US$63.25, while the standard for U.S. oil was up 10 cents to $56.84.
Those are sharp increases since mid-june — about 35 per cent for U.S. crude, nearly 40 per cent for Brent.
“That means slightly higher inflation, but we’re not talking about unmanageable prices,” said Diane Swonk, chief economist of DS Economics. “If it got back to $100 a barrel, then we would have a real problem.”
Swonk said discretionary spending by consumers seems to be holding up despite the increase that has already shown up at the pump. In her mind and those of other economists, consumers are in better shape to manage higher energy prices for many reasons, including a stronger economy and job growth.
Still, consumers will feel the effect, even if it’s less dramatic than price spikes in 2008 and 2014. In the U.S., the average price for a gallon of regular gasoline has risen 30 cents since early July.
Higher fuel costs show up in all kinds of things consumers buy, but some industries are particularly vulnerable. For airlines, for instance, jet fuel rivals labour as the biggest cost — each accounts for about one-third of all expenses.
Helane Becker, an analyst for Cowen and Co., said that with oil in the mid-$60s, she expects airlines to attempt to raise ticket prices. If fuel prices continue to rise, she said, the airlines will cut back on plans to increase flying next year. That could tighten the supply of airline seats, driving prices yet higher.
Andrew Kenningham, chief global economist at Capital Economics in London, said the impact of higher oil prices on companies and households will be limited because for the year as a whole, average oil prices are up only slightly over 2016.
“So far the price moves have not been huge, so the economic impact shouldn’t be that large,” Kenningham said.
He called the increase in average prices for 2017 “trivial” compared with the collapse from around $115 to less than $30 a barrel that occurred between mid-2014 and early 2016.
Crude prices began rising this summer as positive signs rolled in for the world’s biggest energy-hungry economies: the U.S., Europe and China.
Prices were also influenced as expectations grew that the Organization of Petroleum Exporting Countries (OPEC) would continue to limit production next year, and on rising tension between Saudi Arabia and Iran.
Saudi Arabia, the world’s biggest oil producer, is in the midst of an internal power struggle. Its ambitious crown prince, Mohammad bin Salman, has ordered the arrests of rivals, and some think he could take a tougher line against Iran, Saudi Arabia’s rival for preeminence in the Middle East. That raises uncertainty about future oil supplies from the oilrich region.
However, many marketwatchers expect such Mideast tensions to boost oil prices only temporarily — unless a direct conflict breaks out between Saudi Arabia and Iran.
Meanwhile, higher prices are encouraging U.S. companies to pump more. The U.S. Energy Information Administration reported domestic production hit a record 9.62 million barrels of oil a day in the week that ended Nov. 3, bouncing back from less than 8.5 million barrels a day as recently as October 2016.
Oilfield-services company Baker Hughes reported Friday that the number of U.S. oil rigs showed the biggest one-week increase since June.
The drilling frenzy in the U.S. could frustrate OPEC’S attempt to limit supplies and bolster prices.
Analysts at Germany’s Commerzbank say drilling activity tends to rise about four months after a rise in oil prices. So, they concluded, “there is much to suggest that last week’s rise in drilling activity marked the start of a trend.”
“It is most likely that oil prices will drop back,” Kenningham said. “Investors continue to anticipate that prices will drop.”