Experts say oil prices – and gasoline prices – could be volatile through 2022
There’s an old saying among energy economists: the best cure for high oil prices is high oil prices.
In 2022 we might need to amend the phrase to include and a COVID-19 lockdown.
In recent weeks Houstonians have seen the price of gasoline surge past $4 per gallon thanks to high oil prices. At one point, West Texas Crude oil was nearing $130 per barrel, but now – in part due to new COVID-19 shutdowns in China – the price is hovering back around $100 per barrel.
"Lower oil prices translate to lower gasoline prices," said Kenneth Medlock III, energy and resources economics fellow at Rice University. "There is a lag in the adjustment due to the cost of existing inventories. For example, station owners would have already paid a higher cost for wholesale gasoline that is in the tanks at the station, and will not see the lower price affect their bottom line until the next truck delivers fuel to the station. At that point, the lower cost fuel is passed on to consumers."
It typically only takes a few days for prices at the pump to make the adjustment, Medlock said. According to AAA, Houston drivers already are spending a few cents less per gallon this week compared to last.
What's less clear is how long oil prices will stay put.Experts say the oil market is volatile right now, and is likely to remain unpredictable for the foreseeable future.
"There’s an opportunity for the oil price to move all over the place through the rest of the year," said Ed Hirs, University of Houston energy fellow. "It’s going to be very difficult for oil companies – just for that reason – to plan to deploy rigs, manpower, and drill more wells if they don’t see a reasonable chance of making the rate of return."
That's because it's expensive to ramp up oil and gas production, and Hirs said most Houston companies have set up their budgets and drilling activity based on oil likely being in the $70 per barrel range.
Even though scientists say the world needs to rapidly move away from fossil fuels to halt the most catastrophic impacts of global warming, heading into 2022, oil and gas output was set to go up as the world economy recovers from the pandemic.
"This generally encourages more investment," Medlock said, "which we have started to see, but the counter-weight of investor demands for higher returns than what was seen in the recent past meant a more measured response."
However, Medlock adds that when Russia – a major oil and gas exporting country – invaded Ukraine, it triggered more interest in drilling in the U.S., especially in places like the Permian Basin of West Texas.
Still, while activity will pick up in the oil fields, "we should not expect a ‘wild west' approach to emerge," Medlock said — companies and investors will practice capital discipline because the market is so volatile.
"All else equal, higher volatility reduces investment because it is associated with greater uncertainty," he said. "However, the recent higher volatility is also associated with higher price. This should stimulate more investment, especially relative to the previous two years, which will mean the oil and gas industry will be busy."
As Houston companies prepare to increase drilling activity, more international events are impacting oil prices, causing the price to fluctuate.
Experts say news about a potential repair to the Iran nuclear deal — meaning an end to sanctions on Iranian oil — could translate to more oil supply on the global market. That pushed prices down, as did hope that some oil producing countries associated with the global cartel OPEC+ will also ramp up drilling.
However, it was a familiar headline last week that caused oil to sink below $100 per barrel: a COVID-19 outbreak in China is causing shutdowns.
"China oil demand risk is real," Rystad market analyst Louise Dickson said in a weekly oil market analysis. "It is estimated that a severe lockdown in China could put 0.5 million barrels per day of oil consumption at risk, which would be further compounded by fuel shortages due to inflated energy prices."
Essentially, shutdowns in China cause demand and prices to go down. However, Dickson said on the global scale it will cause prices to rise due to other issues, like the lockdown of manufacturing and transport hubs causing potential supply chain problems.
And while China's lockdowns did cause prices to fall a bit earlier last week, West Texas Crude oil is set to settle at about $102 per barrel as traders consider multiple international impacts on the supply and demand of oil.
"The uncertainty of COVID recovery still lingers," Medlock said, "which is a drag on investments that are needed to get supply chains fully re-engaged."
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