Rising Crude Oil Prices

Nottingham Economics Society
Aug 11, 2022
4 min read

Updated: Aug 24, 2023

Over the years, the importance of crude oil has increased drastically. This is largely because its application has also increased in a similar manner. As of today, the natural resource is used for a number of purposes, including:

Producing gasoline and diesel to be used in motor vehicles
Generating heat to keep homes warm
providing the lubrication oil that modern industrial equipment depends on to run smoothly
Producing products like soaps, detergents, and paints

As useful as crude oil is, obtaining it has become more difficult with time. Over the last two years, global crude oil prices have followed an upward trend, raising concerns for economic agents around the world.

Why are crude oil prices increasing?

Russia-Ukraine war

One of the driving factors behind surging crude oil prices is the effect of the ongoing war between Russia and Ukraine. The war, which broke loose earlier this year, has resulted in surging crude oil prices.

Russia is one of the world’s largest oil exporters. Due to the war, the country faces a number of sanctions imposed by the United States (U.S.) and other western countries. One of the sanctions Moscow has to deal with is a ban on all Russian energy imports. Since oil is priced on global commodity markets, the loss of Russian oil negatively affects global crude oil prices.

The demand component

Apart from the Russia-Ukraine war, changes in the demand for crude oil have also been a contributing factor to the price increase. As COVID -19 was declared a pandemic in 2020, countries were forced into lockdowns in order to protect their citizens. As a consequence, the global demand for energy was adversely affected, resulting in falling crude oil prices. As governments injected trillions of dollars into the global economy to facilitate the recovery from the recession caused by the pandemic, the demand for crude oil started increasing, ultimately reaching its pre-pandemic level in 2021. The increased demand, in turn, inflated the price of crude oil faced by consumers.

OPEC production cuts

The organisation of petroleum exporting countries (OPEC), a cartel of oil-producing states, accounts for slightly less than half of global crude oil production. Because of this, OPEC has a strong influence on the global supply of crude oil. In an attempt to stabilise the oil market after the emergence of the coronavirus in 2020, Russia and Saudi Arabia made a deal with other major oil-exporting countries to cut down production. In the subsequent years, however, the demand for crude oil started outstripping supply, causing prices to increase.

The impact of spiralling crude oil prices

Motorists have already started feeling the impact of climbing crude oil prices as the burden is passed on to them by importers through dearer gasoline. In the United States alone, for example, gas prices paid by drivers managed to hit a record high in recent months.

The burden, however, is not restricted to drivers alone. Households are also expected to bear their own share of rising crude oil prices, as the prices of products produced using crude oil are expected to skyrocket in the coming months. Faisal Hersi, an energy analyst in the U.S., predicts higher crude oil prices to reflect in prices of products in grocery stores. This is because industrial fertilizer contains fossil fuels, so eventually farmers will pass on the burden to consumers through dearer farm products, such as Milk, meat, and eggs.

More expensive agricultural products are not the only things that consumers should be concerned about. Petroleum is the building block of many products produced today. This includes products like sunglasses, shoes, and handbags. All these products are expected to become more expensive, as the price of crude oil continues to increase. Ultimately, consumers are the ones that will have to bear the burden of the price increase.

Recent Developments

Despite many predicting crude oil prices to continue to rise, recent changes show glimpses of hope. Over the past few days, oil prices have been on a decline after U.S. crude inventories rose unexpectedly. According to several sources, U.S. crude stocks rose by about 2.2 million barrels during the first week of august. As promising as the recent developments are, only time will tell whether they are likely to be permanent or merely temporary.

About The Author

Neron Sifflore

Neron is an economics undergraduate at the university of Nottingham Malaysia Campus. He is very passionate about the subject and aspires to become the best version of himself. By joining the NES research team, Neron seeks to develop on a personal level and from an academic standpoint.