Hello, Green, Inc. readers. Sophie Mellor here filling in for Eamon.
At yesterday’s OPEC+ meeting, the world’s top oil-producing nations chose to stick to their existing policy of moderate oil output increases despite surging oil prices.
In an oil market bound by extremely tight demand and an unstable situation in Ukraine, analysts say these supply increases may not be able to stop oil prices from reaching the financially and psychologically daunting price of $100/barrel—or to stop a host of other second-order economic effects, including an end to the young work revolt behind the Great Resignation.
“Lower income groups are vulnerable to higher energy costs,” says Paul Donovan, an economist at UBS, who says, “There could be some peculiar indirect effects,” to oil hitting $100 a barrel.
A rise to $100 a barrel would not only exacerbate inflation, Donovan says, but also slow down the job turnover rate and slow the Great Resignation.
He notes that for the TikTok generation of 16- to 24-year-olds in the U.S.—a group that has been reluctant to reenter the labor force—“gasoline is a disproportionate amount of spending for this group. Higher oil prices may encourage a return to the conventional jobs market.”
How prices got so high
Brent—the international crude oil benchmark—was being traded at $89 a barrel on Wednesday, the highest it’s been since October 2014, with banks and analysts predicting it will go even higher.
Oil prices at $100 are a “distinct possibility this year, driven by both strong demand and minimal gains on the supply side,” says Bill Fitzpatrick, managing director and portfolio manager at Logan Capital.
It all comes down to scarcity, Stephen Schork of the oil pricing analyst Schork Group said on Bloomberg Markets. Schork notes that before COVID, the U.S. was the No. 1 producer of crude oil at 13 million barrels a day, but now produces 1.5 million barrels less. “There is no increase because now the mantra is ‘Clean up your balance sheet, clean up your debt, and decarbonize.’”
Storage tanks are running on low reserves and major producers in the OPEC+ alliance are struggling to pump enough to meet production targets, said research consultancy Energy Aspects. “Tank bottoms are in sight across crude and products worldwide already,” it said.
On top of low storage, heightened anxiety surrounding a Russian invasion of Ukraine and unplanned outages in Libya, Kazakhstan, and Ecuador have depressed supply further.
Weak supply has been met with robust demand, providing more support for higher prices. The Omicron variant of COVID-19 has been less disruptive than originally feared, and with most countries planning on easing restrictions and a global resurgence of flight travel expected, oil demand has returned sooner than expected.
“It isn’t in OPEC+’s best interest to see prices go through $90 [a barrel] this year and move higher,” Bob Ryan, chief commodity and energy strategist at BCA Research, told Barron’s, adding that demand for oil could fall if prices remain high “especially if the [U.S. dollar] remains strong.”
As the price of oil climbs, the prices of gas and goods rise along with it, complicating efforts to tame inflation. “It could be the cherry on the inflation cake if we don’t get a moderation in energy prices,” Frederik Ducrozet, a strategist at Pictet Wealth Management, told Reuters.
This has knock-on effects in the job market, where higher wages may be needed to manage surging energy bills. This has a transitory effect on workers demanding higher pay, which could create a sticky inflation environment, says Société Générale senior inflation strategist Jorge Garayo.
But it also could lead some workers who quit their job during the pandemic to pursue side gigs to move back into the conventional job market, according to Donovan from UBS.
EU stands firm
The European Commission stood firm on its decision to classify nuclear power and some forms of natural gas investment as sustainable finance despite mounting criticism from environmental campaigners, EU governments and the European Investment Bank. The initial draft of the “taxonomy for sustainable finance,” published by the Financial Times was criticized for bowing to the pressures of pro-nuclear and pro-gas member states. FT
China and India’s eco warriors
A new Credit Suisse Research Institute report released Tuesday, found that Gen Z and millennial consumers in China, India and other emerging economies are more environmentally conscious, more likely to buy sustainable products, and more distrustful of corporate sustainability claims than their counterparts in developed countries. Bloomberg
Europe’s Carbon Prices breaks record
U.K. and EU carbon permit futures reached a record high on Wednesday as increasing natural gas prices heightened the demand for coal for power generation. EU carbon futures surged past €90 euros ($102) a ton, as higher gas prices drove power generators to switch toward more carbon-intensive fuel. But even with pricey pollution-permit costs, it’s still more profitable to burn coal for power than gas. Bloomberg
Big Oil is back
Big Oil’s profits are back after a year of losses, as ExxonMobil and Chevron reported combined net annual profits of nearly $38.6 billion in 2021—a huge swing up from the combined losses of $27.6 billion reported in the first year of the pandemic. Both companies’ share prices jumped which gave a healthy boost to the investors who still remain after a decade of poor returns. FT
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