Yves here. While there is a point where increases in oil prices in not too long a time reduce oil prices by dampening demand, and that level in recent years has been depicted at $100 a barrel, no one knows exactly where the pain point is. One side of the argument is that US consumers are even more financially stressed than even a year ago, so it may not take much to get them to belt-tighten in a big way. A second is that developing economies will be particularly hard hit, not just due to general vulnerability but also that with the dollar strong, the price of the commodity at $100 a barrel means an even bigger increase in the terms of most local currencies. Offsetting that is that due to inflation and real wages not lagging inflation horrifically in the last few years, $100 a barrel ain’t what it used to be.
However, with many middle class consumers already in stressed, and the Fed sticking to its “as long as it takes” with high rates, bad economic outcomes seem certain, either yet more inflation or a recession with rates still pretty high. Voters are already unhappy with how the economy has performed under Biden. This will not improve their mood.
By Haley Zaremba, who has extensive experience writing and editing environmental features, travel pieces, local news in the Bay Area, and music/culture reviews. Originally published at OilPrice
- Oil prices have risen by 30% since June, largely due to production cuts by Saudi Arabia and Russia, members of OPEC+.
- Higher oil prices historically decrease gasoline demand; last year, a jump to $110 a barrel resulted in a 4.1% dip in U.S. gasoline demand.
- Despite short-term projections that the price will stabilize below $100, the potential impacts, especially in developing countries, may have long-term economic repercussions.
Crude oil prices are on the rise, driven by stark cutbacks imposed by Saudi Arabia and Russia, the main forces behind OPEC+. The cuts, implemented by the oil cartel in order to bolster oil prices, have been extremely successful, with barrel prices rising by a whopping 30% since June. Now, prices are hovering ever closer to the USD $100 per barrel mark, and could even surpass that hallowed and feared metric on the back of Russia and Saudi Arabia’s recent announcement that they intend to extend the current voluntary production cuts. Historically, high oil prices have been nothing but good news for the oil industry, even as it causes strife in other sectors. But this time around, it might be too much of a good thing even for Big Oil.
While high oil prices can spell pure profit for the oil sectors, it’s a fine line between stimulus and disincentive, as high prices at the pump can also cause significant dips in demand as the market reels from sticker shock. For example, in June and July of last year, when oil prices hit a blistering USD $110 a barrel average, gasoline demand in the United States plummeted by 4.1% compared to the same period in the previous year when oil was selling at USD $70 per barrel. And as that $110 mark fell, so too did the size of the year-over-year demand gap, underscoring the correlation between high oil prices and consumer reticence.
And that cooling effect could be even stronger this year, as families in the United States have much fewer savings to fall back on and will likely be operating on a significantly tighter budget. According to the Bank of America Institute, the average savings of U.S. households making $50,000 to $100,000 a year have fallen by half. And that worrying downward trend is about to be exacerbated for millions when student-loan repayments resume next month, representing around $100 billion a month at a national level.
Indeed, unsurprisingly, the spike in oil prices has caused much hand-wringing over at the Federal Reserve. Rising oil prices were key drivers of recession in the United States in the mid-1970s, as well as the early 1980s and 1990s, as energy markets and prices at the pump “drove up inflation and robbed consumers of purchasing power.” Accordingly, fears of recession are rising in lock-step with crude benchmarks. “Policymakers will be on high alert for a gasoline-driven rise in inflation expectations in particular, as they fear that could lead to a more broad-based increase in prices,” Bloomberg reported this week.
“The run-up in oil prices is at the very tip top of my worries at this point,” Mark Zandi, chief economist at Moody’s Analytics, was quoted by Bloomberg. “Anything over $100 for any length of time, and we’re going to be very sick.” And the oil industry itself is likely not immune to this sickness.
While the state of savings and household economics in the United States is precarious enough, the full impact of consumer drawbacks will be actually felt in developing countries – as usual. Bucking historical trends, the value of the U.S. dollar has only continued to rise along with oil prices, putting a painful squeeze on economies with weaker currencies and lower cash flows that are nonetheless forced to buy dollar-denominated oil. This will have a serious impact on global economics and energy markets, as these developing countries include the monster markets of India and China.
While the USD $100 mark is not significantly financially distinct from, say, a USD $99 per barrel mark, three digits have an outsized psychological influence on consumers and on the energy market as a whole. Crossing that line will therefore cause disproportionate shockwaves to a strapped and fragile global market that the energy industry should be prepared for in the coming months. Luckily, most experts are predicting that the foray into triple digits will be short lived, but the damage done will likely have a longer shelf life.
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“student-loan repayments resume next month, representing around $100 billion a month at a national level.” The link to the WSJ article says $100 billion a year.
Probably doesn’t matter much– most still can’t pay.
I think $100 billion USD per month is possible. Take a portion of the currently known student loan debtor population, say, 35 million people, and assume a $500 per month payment. That’s $17.5 billion USD a month. Regardless, the total monthly payment from the population in that link adds up to more than $100 billion USD a year.
According to the EIA, we Americans use about 370 million finished gallons of gasoline a day. Which means a 0.10$ increase in the price of gasoline per gallon costs us an additional $37 million each day, or, roughly, $1.1 billion USD per month.
Rolling those two bits of data together, we’re looking at taking at least $20 billion USD per month out of the real economy starting in October. That’s $20 billion people won’t be spending on toys, movies, clothes, new houses, furniture, cars, repairs, school, their kids, food, restaurants, etc.
What might be giving our August leaders confidence that won’t be too big of a deal is that amount represents about 0.1% of monthly US GDP. But we know that isn’t uniformly distributed and we know the consuming engine of our economy relies on people having money to spend. The system isn’t linear and regional differences can hide a lot of problems.
So if I had to guess what we’ll see are a bunch of op-eds from Paul Krugman saying that this isn’t a problem and that the economy will be great and maybe someone is suffering but he doesn’t know who. Meanwhile, we’ll see deaths of despair spike. We’ll see Dollarstores go out of business. We’ll see crime increase. We’ll see foreclosures increase.but the top line numbers will hide most of that so our leaders won’t care to look at what’s really going on.
> I think $100 billion USD per month is possible.
No way. Total student debt is $1.75 trillion. At $100 billion per month implies that it would be paid of in a year and a half.
Not with interest and not with more debtors entering the population of people making payments. I don’t know how much people are paying each month. I gave reasonable estimates based on the sources I know of and can trust for accuracy. I’m certain this is costing the US more than $100 billion per year. I don’t know what the actual amount is though. As a reasonable estimate, I’d assume that with students loans, increase in gas prices, policy premium increases, and cost of food increases, US consumers will see somewhere between an additional $300 billion to $500 billion extracted from them by October 2024. That might not put us in a recession. But it won’t do the people in power any favors.
“we’re looking at taking at least $20 billion USD per month out of the real economy starting in October. That’s $20 billion people won’t be spending..”
Are Not Spending, even though they could.
It’s a deliberate choice to help discredit the Bideneconomy. We’re still using up the last of the pre-bought items purchased in Febrary 2017 after Trump’s innaugural. Will do without and or borrow from those who have extras, to be replaced at retail in February of 2025.
We’re already in the BidenDepression:
Take note: California sales tax collections off 34% in one year. https://www.ocregister.com/2023/09/26/california-tax-collections-tumble-30-billion-in-a-year/
“People had extra time to file”…really?
That is not what the article says. It is overall tax, not sales tax, which is down 34%. A big contribution will be from capital gains tax, which is down, because 2022 the stock market performed badly.
Unsurprisingly US-centric. I am curious as to what is happening in the Russian-China-and BRICS sphere wrt energy prices. Are long-term contracts keeping their prices down so it is only NATO and NATO satellites that feels the inflation burn? Just how important is big oil to overall global oil production? to NATO-stan oil production?
Surprisingly hard to find:
https://www.statista.com/statistics/272710/top-10-oil-and-gas-companies-worldwide-based-on-revenue/
neglects state companies, which dwarf public companies. My SWAG,Big Oil is not the majority globally (NATO-stan, yes).
short answer = yes. but of course not all of China’s energy consumption is via long-term contracts.
One reason why, pre-Maidan, Putin was begging the EU for long-term contracts….win-win for producers (certainty) and buyers (certainty)
But the problem with long term contracts is that the market disappears, and hence lots of opportunities to make a profit, even if you don’t produce or consume the product.
So capitalism is against long-term contracts (unless they are extractive and monopolistic, like toll roads and stuff).
Parking meters.
good part of china energy imports are for the export led industrial sector. if the western consumers health is not good, there won’t be no request of extra industrial production, and consequently, of more oil purchased. then, if china buys more oil from russia or saudi arabia there won’t be any dollar payment, cause they dedollarize the transactions. dollar prices apply, for example, if china wants to sell (with profit) to the western countries the oil purchased at discount.
Yep. How does this benefit the OPEC+ nations?
The author, Haley, doesn’t seem to understand the implications for the oil exporters. They are going to do what is in their interests. Demand destruction may be more than offset by higher profit per barrel – they will optimize for their profit.
A Multipolar world means that the US can’t dictate the outcome.
Having spent the last 23 years in OK, I know they all get real happy when prices get up. More of the stripper wells start up again as well, although there seems to be a disconnect with gas prices.
Given that the US Federal Reserve is raising interest rates in order to decrease economic activity in order to increase unemployment and drive down wages, I don’t see why oil producers deserve much blame for raising prices.
Moreover, the price of crude oil has become less of a component of oil company prices for gasoline. For example, in Southern California, gasoline is over $6 per gallon. There are about 41 gallons in a barrel. At $100 per barrel, crude oil is $2.43 per gallon. So if crude oil was free, in California the price of gas would still be over $3.57 per gallon. Kinda hard to blame OPEC for that.
Let me get this straight. The powers that be desire all of us to switch to electric vehicles and rooftop solar, yet they anguish over the high price of oil. Shouldn’t they applaud high oil prices as a strong incentive to wean off fossil fuels? With their anguish are they admitting that the transition to EV and solar will take a very long time, and that in the meantime (decades perhaps) fossil fuels will remain the dominant energy source globally. If this is true, the planet is screwed, and so are we.
Oil at or over $100 per barrel is bad for the fossil fuel fired waste-based economy. It is good for the possibility of having a conservation-based economy which some people would prefer to see emerge.
The higher oil goes, the less oil gets bought and burned in the short run. The longer oil stays high, the more steady pressure is exerted to change the economy from waste-based to conservation-based.
People have said that only radical measures can reduce the amount of carbon emissions into the atmosphere. One such radical measure would be to price oil at $200 a barrel and never let it come down again.
The problem with doing it by price is that the poor suffer. It’s rationing per denarios rather than per capita.
The degrowthers like Jason Hickel begin with a commitment that the move to contain Overshoot will not be accomplished on the backs of the poor whether they reside in the Global North or South. They’re working on models to learn how best to do that.
There is a better way than letting the price rise. Admittedly, the hour is getting late, but if there is any hope to accomplish this before chaos, the project can’t be indifferent to the burden on the poor.
Rationing per capita brings counterfeit coupons.
Rationing by price hurts the poor, but gov can cut their taxes or send them compensation. But rationing must happen, and the decline in consumption last year again demonstrated supply and demand linkage.
The world has mostly run out of cheap oil, remaining bits are pretty much all in Persian gulf. The super giant Ghadar (sp?) has been producing 5mmb/d since before ww2, maybe finally in decline?
Russia’s far east has also been producing for a while. Us fracked fields probably about to enter terminal decline. So far high prices have generated low prices, but drying exporters will not be able to keep up with demand from still increasing world pop.
So rationing will happen, and the sooner the better for all species. Frankly, this country anyway should reduce consumption of many things now before events force us to better match imports with exports.
There was an article years ago about that oil field slowly depleting, called ” Ghawar is Dying”.
Turns out it is still on line.
https://www.resilience.org/stories/2003-05-29/ghawar-dying/
There was an oil analyst who was also a banker somewhere in Texas ( Dallas? Houston?) who analysed all the publicly available and semi-hidden numbers he could find. He decided that the KSA and all relevant helpers were wildly overestimating the amount of oil the KSA still had. He wrote a book about that called Twilight In The Desert.
https://en.wikipedia.org/wiki/Matthew_Simmons
https://en.wikipedia.org/wiki/Twilight_in_the_Desert
Resilience.org posted a review of that book. ( Resilience is an outlet of the Post Carbon Institute).
https://www.resilience.org/stories/2010-12-15/review-twilight-desert-matt-simmons/
I wonder what will be the size of the sinkhole resulting after the total depletion of Ghadar field?
we’re seeing the opposite: high interest rates are reducing the rest of the govts budgets, and so the welfare and compensations in general. while no one never propones something like a tax for private jets or a tax for suvs. indeed they’re selling ecologically unsustainable ev suvs. apart of that, metropolitan areas are ecologically unsustainable, so the whole residential logistic should be redefined to adapt to a 200$ oil price. for example making something like the urss commie blocks, that had homes near to workplaces and serviced by public transportation.
James Hansen offered a partial answer-attempt to this, namely his Fee and Dividend plan against fossil fuels at the wellhead, mine mouth, etc. I will not reprise it in a comment. Better to connect to wikepedia’s more extensive reprise and explanation of it.
https://en.wikipedia.org/wiki/Carbon_fee_and_dividend
High oil prices will do nothing besides enrich those who can pump it and dump it. You appear to have fallen victim to the ideology of market-based solutions.
The only way to transition to “conservation-based” is with cheap oil, otherwise everything else (microchips, your groceries, etc) become stupid expensive.
But what about climate change? I hear you say. We need immediate action now! I hear you shout. Well, there’s the rub: there is no fixing this, enjoy the relative peace and stability while we have it.
Yeah….the Saudis are our buddies…yeah.
I assumed oil has been over $100 since Ukraine war
Oh, Mark Zandi…must be Mark Zandi that was shilling for the RE and mortgage interests during GFC meltdown. This from Wiki (with apologies)…‘Zandi infamously discounted the 2007-2009 housing market collapse stating to the New York Times in March 2006 that “Even in the most vulnerable markets, most people just have to look through it and ignore it because it’s of very little relevance to them.”‘
DC…where everybody goes to fail upward.
The economy is saved!
I’ve noticed this weird schizophrenia — we must attack climate change, but high oil prices are bad for the economy. Both are undoubtedly true, but if oil prices are kept low, political pressure comes from both the oil companies and the population to keep pumping and using oil profligately.
If the economy is going to suffer, I’d rather it be over oil rather than, say, the MIC or Big Pharma. Of course, all policy depends on a political class that looks forward rather than their own pocketbooks.
We are, sorry to say, doomed.
A disincentive is what’s needed if we are to make any meaningful progress on climate change, probably a much stronger one than talked about here (4.1% is a blip).
The minor problem is that oil is wired into so many sectors of the economy and daily life at a critical level that even if prices move by a lot, users of oil for non-discretionary purposes will just have to suck it up and take it. Even if you’re fortunate enough to be able to manage without a car (uncommon in the US particularly) the price of oil is baked into everything, from the price of groceries to consumer goods to anything that requires any kind of energy intensive manufacturing process. You can’t escape it – or you can, but it will cost money, meaning that if you’re poor you really can’t.
I think we are seeing a variant of the Brexit dynamic at play here, where no politicians are willing to tell voters the truth about the degree of sacrifice needed to meaningfully tackle climate change because they fear it will cost them too many votes. Voters in turn would rather cling to comforting fables that require little short term change (electric cars and other techno-fix fantasies) than accept the kind of short term pain required – and in a democracy, they have the power in sufficient numbers to elect leaders that enable them in this.
Oil prices were always going to spike over $100. Instead of preparing, we (the US) has mainly responded with denial, wishful thinking, blaming environmentalists, and just plain scapegoating. I can only shake my head at the willful ignorance and/or stupidity.
How about the frackers? The higher the price the oil, the more economically sustainable their operations become no? Yes there are severe environmental issues related to fracking but if the relevant companies had cared about those issues in the first place, they wouldn’t even start drilling in the first place.
At what point does the price of oil rise so high that the demand falls low enough that cheap-and-cheaper-to-produce big-field oil can meet all the demand, and frackoil can’t be sold at all?
Those who wish for fracking to stop should wish for the price of oil to reach that high point and then stay there and never come down again.
Since when is a 4.1% demand drop a “plunge”? And implying it’s comparable to the run-up from 70-110 is strange. Their profits are doing just fine with that ~45% net increase between those two. Demand seems very inelastic. With so much waste locked in from our car heavy transport infrastructure the us will have a very hard time adjustinf
I believe energy demand is pretty inelastic, so that 4.1% fall in a short period a time might not be an exaggeration.
Nice re-election you have there, President Biden — would be a shame if anything were to happen to it …