• Oil prices are strongly influenced by the global economic outlook.
  • Changes in supply and demand and geopolitical tensions cause cost fluctuations.
  • An orderly energy transition tin can protect confronting oil toll spikes.

Demand for oil plunged in 2020 during the pandemic when lockdowns led the price to fall below cipher outset time in history due to a major downturn in economic action.

Oil prices have since risen sharply to nearly $100 per barrel following stiff economical recovery mail-lockdowns. As the economic system grows and so does the need for oil. Moreover, rise geopolitical tensions between Russian federation and Ukraine and in the Centre East are stoking supply fears. This is contributing to rising aggrandizement and concerns almost economic recovery.

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Image: Bloomberg.

Oil accounts for approximately iii% of GDP and is one of the most important commodities in the earth – petroleum products can be found in everything from personal protective equipment, plastics, chemicals and fertilisers through to aspirin, clothing, fuel for transportation and even solar panels.

A global movement towards sustainability may eventually change the low price elasticity of demand for oil. But while the energy transition continues quickly information technology'south important to understand how supply and need factors influence the price of oil and therefore the wider economy.

Maciej Kolaczkowski, Manager Oil and Gas Industry from the World Economical Forum'due south Energy, Materials, Infrastructure Platform, outlines the cardinal factors which determine oil prices, their affect on the global economy and implications for the energy transition.

Ascent oil prices

Oil prices are currently at virtually $100 a butt. What has caused this price rise and why are oil prices so volatile?

Kolaczkowski: No one really has a crystal ball – tomorrow things can go in exactly the opposite direction. Change and volatility seem to exist the just abiding in the oil market place. However, it is probably rubber to say that there are 3 key underlying reasons:

ane. Booming economical growth driving need for oil

Two years ago when COVID-19 started, there was a plunge in economic activity and oil demand. Producers were adjusting production levels, only there is only so much 1 can do without destroying reservoirs or uppercase. Storage capacity is besides limited. Moreover, there was dubiety nearly how astringent the economic crisis would be and how long it would concluding. These compounded factors pushed oil prices to very depression levels not seen in decades. At that place was fifty-fifty a short catamenia of time when oil prices went downwardly to minus $twoscore.

This difficult menses lasted several months. Information technology was followed by a surprising economic rebound, driving demand for oil and oil products. It's estimated that oil demand at this point is back, or has already surpassed, pre-pandemic levels. In other words, it has never been higher. Nota bene, similarly CO2 emissions. I recollect when the pandemic started, there were high expectations for CO2 emissions reductions. Indeed it materialized and emissions dropped several percent in 2020. Just these gains were curt lived, and today information technology is estimated that emissions are likewise in a higher place that of pre-pandemic levels.

two. Limited oil supply due to long investment cycles and cautious capital allocations

Supply has not been able to fully respond to increased need. OPEC has been scaling up oil production slowly, but it also has express spare chapters and is probably cautious not to oversupply the market again. Beyond spare capacity, oil production has very long investment cycles. It can take upward to a decade to reach kickoff product from the moment the resources are confirmed. Some unconventional sources tin can evangelize product much faster, but these are limited in scale.

Moreover, all producers are cautious in allocating upper-case letter. First, they learned their lessons from an oversupplied market when oil prices dropped to minus $40. Second, perhaps more than importantly, there is stiff force per unit area on the manufacture non to develop new fields, to hold or decrease investment in maintaining and growing product and to divert the capital to green investments.

3. Geopolitical tensions

Geopolitical tensions between Russian federation and Ukraine and increased instability in the Middle East add to oil market nervousness.

Toll of inflation

How do oil price increases touch inflation and what does that mean for the global economy?

Oil is 3% of global GDP. So, if 3% of global Gdp is twice equally expensive tomorrow, clearly, this will have some bear on on inflation. But I don't think it's a major driver when it comes to inflation. I call up that inflation is actually driven by loose budgetary policies.

In that context, oil prices volition not be the biggest factor when it comes to inflation just information technology is still important. Why? Because oil is basically in everything, so information technology'south not a volumetric touch, just it impacts price of almost everything. An increment oil cost volition not only exist seen at the gas station, only it will exist felt in virtually all the goods and services we use. Considering oil is a feedstock, source of energy and is used in the transportation of many things.

The true price for consumers

People tend to recollect in inflation terms virtually the price of, say, the cost of filling up their machine simply what might people not sympathise about oil prices? i.e. what are the costs beyond the petrol pump?

When it comes to oil as a source of energy, depending on where y'all are, l-lx% of what consumers pay at the pump is revenue enhancement. We tend to focus on the fluctuation in the crude oil price, which is important, but the really big thing that people don't know is that in every €1.l spent on a litre of gasoline, they pay 70-80 cents to the regime. Importing countries like the EU brand more money from taxing oil that producing countries from exporting it!

In every €ane.50 spent on a litre of gasoline, [people] pay 70-fourscore cents to the government.

—Maciej Kolaczkowski.

Impact on oil importers and exporters

What would be the touch on of price fluctuations between oil importing countries and an oil exporting countries?

High oil prices are a challenge for importing countries while at the aforementioned time work to the advantage of exporting countries. It is really a zero-sum game. With price changes, in that location is a shift in profiting between oil producing and oil consuming countries.

Orderly energy transition

Exercise rise oil prices create a market for renewables every bit people seek climate-friendly alternatives?

High oil prices amend the economics of electric vehicles (EVs) and other alternatives like hydrogen and other potential solutions for mobility, simply not necessarily directly touch on renewable energy. Information technology is because renewable energy is not directly a substitute for oil. Of class, the assumption is that if you go for an EV, you lot probably want to utilize renewable energy and by this you would also drive demand for renewables. Notwithstanding, in the real world information technology is not that straightforward.

On the flipside, inexpensive oil, i.e. market place conditions nosotros observed since 2014, have likely impacted negatively the competitiveness of EVs and other forms of sustainable mobility. Maybe that'south why EVs and other solutions accept non scaled as quickly every bit predicted. Simply, oil was so cheap for years.

What'south the World Economic Forum doing nearly the transition to clean energy?

Moving to clean energy is key to combating climatic change, yet in the past five years, the energy transition has stagnated.

Energy consumption and product contribute to 2-thirds of global emissions, and 81% of the global energy arrangement is nevertheless based on fossil fuels, the same percentage as 30 years ago. Plus, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activeness) are slowing. In 2018 energy intensity improved by i.ii%, the slowest rate since 2010.

Constructive policies, private-sector activity and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global free energy arrangement.

Benchmarking progress is essential to a successful transition. The World Economic Forum'southward Free energy Transition Index, which ranks 115 economies on how well they balance free energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing energy transition is the lack of readiness among the earth'south largest emitters, including US, China, Bharat and Russian federation. The x countries that score the highest in terms of readiness account for but ii.6% of global almanac emissions.

To future-proof the global energy system, the Forum's Shaping the Future of Energy and Materials Platform is working on initiatives including, Systemic Efficiency, Innovation and Clean Free energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) is working to assemble public and private partners to further the industry transition to fix heavy manufacture and mobility sectors on the pathway towards net-nada emissions. MPP is an initiative created by the Globe Economic Forum and the Energy Transitions Commission.

Is your organisation interested in working with the Earth Economic Forum? Find out more hither.

What does the future agree for oil?

Do you think the current surge in oil prices is temporary or marks a more permanent shift? If so how would that affect the global economy?

My expectation would exist that oil prices will fluctuate in long-term. It is very hard to predict level of prices or even direction of change.

In any case, I think the oil prices may stay at $100 or more, all the same not for long and certainly not forever. Because in the medium-term supply should catch up with demand growth while hopefully geopolitical tensions ease. In the long-term, I imagine the demand volition plateau and perchance showtime decreasing at a certain betoken. And so, information technology's hard to run across college oil prices. The key uncertainty is when that volition happen – experts differ strongly. Some say that such a peak is just a few years from at present, others say more than like a few decades.

If the energy transition is not a concerted attempt between the demand side changes followed by supply side adjustments, temporary oil price spikes are very likely.

—Maciej Kolaczkowski.

But having said that, I think there is a run a risk of large spikes, temporary spikes, to even higher levels than we see at present to perhaps $150-200. If the energy transition is not a concerted attempt between the demand side changes followed past supply side adjustments, temporary oil price spikes are very likely. Forcing supply curtailment without adjusting demand will create structural imbalances that will be difficult to address due to the very long investment cycles to produce oil.

There is this pressure to stop investing in oil production as we transition but there is a need for an agreement that we also need this supply. So we demand to observe this balance with the free energy transition betwixt at present and 2050. The point is not to undermine the transition, merely the transition needs to be led on the need side by consumers, private and industrial. It is a task for each and every one of the states, not just for "Large Oil". Otherwise, the chance is that it could be quite an erratic future.