Oil Prices Sky Rocketing

By Marlowe Bjorklund

The increase in gas prices has a serious impact on businesses and families alike. Gas prices have seen a drastic increase throughout 2021 due to a global shortage of the commodity. As economies come out of the pandemic, demand for natural resources has increased tenfold as production ramps up again and people start to return to their pre-pandemic lives. The last winter was long and cold in Europe and Asia, and the impact of increased demand for heating then has left gas storage sites unusually empty for this time of year. Not only do higher gas prices mean global supply chains are threatened but this has a serious impact on businesses and families alike.

Over the stressful period of the coronavirus pandemic prices for many items increased and decreased as demand rose and fell. From the panic buying of toilet paper, the rationing in the first several months of 2020, and social upheavals, people have been stressed about their financial wellbeing over the pandemic. Many people look to events like the #BLM movement and stress about basic home goods – or perhaps the more spontaneous and previously unthought-of movements of the last two years, such as Wall Street Bets who influenced stocks like Gamestop which was previously unimaginable to the established financial institutions as reasons for why they’re in financial strains. One thing which is hitting people’s pockets and businesses in a meaningful way is the shift in oil price. This is because of the ripple effects on the market with that shift. The increased gas prices have both micro and macroeconomic effects. The Federal Reserve Bank of San Francisco discussed the connection between gasoline and oil prices. For families across the globe, with the increased prices more money and therefore more of their budget will be spent on gasoline. This means less money is spent on other goods and services, stifling other aspects of the economy and for many of those families, they will experience a shift in lifestyle due to lessened economic freedom; in addition to recovering from the pandemic. Business expenses for a company’s production overseas are also more expensive. Transportation and manufacturing and heating expenses are all increased, and the direct and indirect correlations to oil price increases will hurt the economy as oil prices continue to rise. 

Whilst in the beginning of the pandemic there was a major decrease in oil prices, with record lows hitting the market simultaneously as serious oil overproduction. This meant there was too much supply for the lowered demand across the globe. However, as the world continues to pick itself back up, the Covid-19 pandemic continues to affect businesses in lessened and different ways. Some businesses began to suffer as they reconsidered their deals with the oil and energy industries. While some businesses have pre-established deals for their energy consumption. Other companies have not been as lucky. These companies are now in the position to either make a deal with the current price of oil or pay without a deal, for the time being, waiting it out with hopes of prices decreasing soon. A much larger stress when taken in the context of the increased gas prices which might only continue their rise, leaving businesses paying increasingly high prices or stuck at a disproportionately high cost in the long run. This cost will then continue along to the consumer with the increases at every other step of production costing the businesses more, the consumer will be the final way for that expense to be put off of the companies. This will only worsen the economic cycle’s effort to return to a pre-covid level, as with added production costs and decreased demand with the heightened prices, it will lessen the economic activity.   

Gas prices have been going up more and more in recent weeks. The effect of this increase is felt in different ways across the globe. In the USA, the national average gas price of regular unleaded is $1.09 higher than last year at $3.27. In California, it’s even higher at $4.44 per gallon with some counties being as much as $4.65. In Asia liquified natural gas had a 40% surge, leading to a record high of more than $56 per million British Thermal units (a measure of heat content for energy sources). This increase is complicating the job market and the supply chain for goods throughout the world. For instance, the increase in online shopping over the course of the pandemic along with the overall increase in online purchases from before the pandemic has more companies investing in drivers. With increased gas prices, this is damaging this new sphere of the economy with that price increase as companies are wanting to spend less on transportation. Alternatively: heating. While the cost of driving is obviously increased with a shift up in prices, heating is also an increased expense which not all businesses and families are wanting to take on. Globally, the increased prices will lead to an overall decrease as peoples’ and businesses’ financial abilities are challenged. 

In the UK there has also been a sharp increase – another set of record highs – as household and small businesses continue to suffer. With 142.92 p being the average daily price on October 24th, drivers are looking forward to a seemingly “truly dark day.” 28p was the price for a litre just over a year ago, however currently prices are about 30p higher, and unlike the £63 cost to fill a 55-litre tank as of October 2020, people now face the price of £78.61, which increases financial stress as winter approaches. Simon Williams – spokesman for the Royal Automobile Club said it will continue to negatively affect the wider economy: less productivity, decreased transportation of goods, complications in the supply chain, and people shopping less as a number of examples.  

Brent crude, a crude oil held as the international benchmark of oil prices, rose to over $80 a barrel, the highest it has been since October 2018. For reference, on December 30th 2019 it was $68.4 per barrel. The increasing prices over seven consecutive days worsen the crisis, and analysts believe that the price will keep on rising as demand surges as we recover and pull out of the previously lowered level of energy use throughout the waves of shutdowns. Goldman Sachs predicted that Brent crude could rise to as much as $90 per barrel by the end of the year. This is in sharp contrast to early 2020, when gas prices fell below $0. Beyond that, there is also a change in the oil and energy market as in 2021 9 energy companies went out of business as reported by BBC UK. This led to 1.7 million customers forced to move to new suppliers and with higher rates. With fewer choices of where to make their energy deals, companies are under a higher level of pressure and stress, with the added layer of varied Covid responses being no aid. While some countries have received a high level of government compensation others have been less fortunate over the duration of the pandemic. 

The drastic increase in gas and oil prices have had a big impact on the health of global economies and the full extent of these influences will come to fruition in the long term. In the post-pandemic world, these price changes have negatively impacted businesses in their recovery efforts from Covid-19 and have hurt the financial well-being of families across the globe. Governments and regulatory authorities have attempted to enforce price caps to ensure that prices do not spiral out of control however, with continuous increase it is hard to see an end to this. Moreover, as many climates are approaching winter another increase in demand for gas and oil will leave supplies’ further diminished and the competition for these commodities will be high.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.

Image: Alamy Stock Photo

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