- Angel Bermudez
- From BBC Newsworld
Last Monday (11/10) a barrel of WTI oil topped $80 (436 R$) – the first time in nearly eight years.
The price of West Texas Intermediate (WTI), a type of crude oil used as a price reference in the US, closed at $80.52, confirming the uptrend recorded for months.
The COVID-19 epidemic and the trading restriction measures adopted in many countries to combat the novel coronavirus have led to lower prices. Just a year ago, the cost of West Texas Intermediate crude was only $40.
But as the end of the pandemic approaches, prices have soared. What is the reason for this large increase?
The answer to this question, according to specialists, includes not only traditional factors – such as the performance of the countries of the Organization of Petroleum Exporting Countries (OPEC) – or situational factors, such as the epidemic, but also a new strategy of oil-producing companies. in Brazil.
Reactivated demand, controlled supply
“There is a strong correlation between the epidemiological situation and higher oil prices,” says Mark Finley, a researcher specializing in energy and oil at Rice University in the United States.
The expert explains that just as there was a strong correlation in 2020 between the pandemic and lower oil prices, the recovery this year has affected both demand and supply of oil.
“This is the main factor. On the demand side, we are seeing a revitalization of the economy and mobility after the impact of Covid-19, so after we saw the biggest drop in oil demand last year, this year we will probably see that the biggest increase.”
On the supply side, there is a combination of production cuts by OPEC and other producers such as Russia (now known as OPEC+), and a drop in production in the United States and elsewhere due to low prices that hit a barrel last year. Finley adds.
OPEC, Russia and other producers have an agreement to gradually increase supply in order to eliminate the production cuts they have implemented to counteract the decline in demand due to the epidemic.
However, these increases are not automatic, as countries meet monthly to assess the market and decide on its implementation.
The extraordinary strategy of American producers
A new element that contributed to the increase in the price of crude oil was the restrictions imposed by oil producers in the United States as well.
This is an unusual strategy for these companies, which are used to increasing production whenever oil prices are favorable.
“One of the amazing stories in the oil market this year is that US producers have been very disciplined and have not responded to higher prices with a significant increase in oil extraction,” Finley says.
“There was an increase, but it didn’t come very close to what it was before the pandemic, when prices, by the way, were lower than they are now. It was a big change,” he adds.
According to data from Baker Hughes, which provides services to the oil and gas sector, there were about 533 operational drilling rigs in the United States last week, which is an increase of 233 from last year, but far less than the 1,580 drilling operations in the United States. It was active the last time oil reached those prices in October 2014.
The United States has a great potential to rapidly increase its production through exploration of shale oil, whose wells can be operational in a short period of time and which does not require large long-term investments.
Currently, about 65% of US production is shale oil, according to US government data.
Usually, whenever oil prices rise significantly, shale oil producers increase extraction. But this time it didn’t happen. why?
“It’s mainly down to the investors,” says Mark Finley. “For 10 years, these companies have been growing rapidly, but without giving much money to their investors, who are now more cautious and demanding, instead of reinvesting profits in opening more wells and increasing production, companies are using resources in a smarter way so that they can achieve win,” he explains.
The economic slowdown caused by the COVID-19 pandemic has affected many oil companies in the United States severely. WTI oil was traded at negative prices. In other words, companies had to hire third parties to take care of the oil and not have to store it.
“This has never happened before and is partly responsible for being careful [no mercado]. I think that had an effect. It may be one of the reasons why investors changed their position in this way,” says Finlay.
“With this strategy, the US shale oil industry is likely to achieve the best financial results in its history this year,” he adds.
Thus, containing production benefits not only the OPEC countries and their allies, but also American companies.
The rapid recovery in demand after activity halted due to the pandemic has led to a complex economic situation.
Problems in the supply chain and rising raw material prices lead to a relative scarcity of certain types of products, which fuels inflationary pressures. Rising crude oil prices add to all this.
“The high price of oil contributes to increased inflation because oil is the raw material for many products, the most important of which are gasoline and diesel, which is a fuel for transportation, but is often used as a fuel to generate electricity,” says Jose Valera, a lawyer and oil specialist at the Houston law firm Mayor Brown. , Texas.
“In addition, oil is also an input to the petrochemical industry, where it is used to make plastics and other products,” he adds.
In the US, drivers are already feeling the impact of the increase in the price of gasoline, paying about 40% more per liter compared to last year. In Brazil, prices are higher due to the devaluation of the real against the dollar.
Valera explains that as oil prices rise, the cost of producing gasoline and diesel increases, which translates into higher costs for producers and carriers. These costs are eventually passed on to the consumer, as prices rise.
“Producers and carriers need to recoup these high costs to continue to maintain their profit margins, and thus be able to maintain their own business,” he adds.
Valera sees chances that the value of a barrel of oil will continue to rise, or at least not fall significantly from current levels.
“The recovery of the economy after the impact of the pandemic is manifested in very sustainable growth in most countries of the world, which, as we see now, translates into increased consumption of energy and fuel, which means an increase in demand for oil. But production will not necessarily increase at the same rate.”
Climate change challenge
Jose Valera says that in addition to the strategy of OPEC and other countries to limit oil production, there is another factor limiting production: the fact that many oil companies are investing less in oil to increase investment in energy and renewable fuels.
Far from being the result of goodwill, the change comes as societies around the world are pushing companies to make the transformation — especially in Europe, says Mark Finlay.
“Companies like Shell, Total and BP are trying to pour more resources into new forms of energy. Some US companies like Chevron and ExxonMobil have said they are looking at ways to reduce carbon dioxide emissions from their operations,” he said.
Finley points out that the rise in crude oil prices is happening on the back of the rising cost of coal and electricity in many places.
“Part of what is happening is that there has been an adaptation to the traditional energy landscape and it is important to remember that while everyone wants to move toward a low-consumption fossil fuel future, they still provide 85% of the world’s energy demand,” he says.
“The main challenge for us as a society, for politics and business is how to continue to provide reliable and affordable energy to keep the economy running today, while at the same time investing and planning for the transition to a low-energy future,” Finley says.
“One thing is becoming clear with the Covid-19 epidemic. Last year, we saw the largest drop in carbon dioxide emissions in history, but no one wants to repeat this experience because it was driven by the largest decline in the global economy since World War II. Not the best way to reduce carbon dioxide²”.
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