Have you noticed recently that every time you pass by a gas station the price of gas seemingly increases? Besides paying more for gas what other ramifications will this have on you, the average investor or consumer? Oil is considered to be the “lifeblood” of the economy, as we use it for everything from powering our vehicles, to warming our homes, to making plastic and creating electricity. The most commonly used benchmark for the price of oil in the United States is West Texas Intermediate Crude Oil (NYMEX: WTI Crude) which is currently trading at roughly USD 61 per barrel and up 33% this year.
As the COVID-19 pandemic took its toll on the markets earlier this year the price of oil crashed as there was almost no demand for it since travel was suspended globally. As global restrictions are slowly lifted and travel begins to restart, there has been a radical increase in demand for oil. This in turn has caused the price of oil to surge, and it could have many implications for the economy. While investors in oil and the energy sector could make substantial profits, day to day costs for the average consumer will increase. Gas prices will spike, which ultimately will make transportation more expensive. Goods and services that use oil will become more expensive to produce, and will increase in price. Consumers will have less money and won’t be willing to spend as much while the price of goods and services will increase. This will cause inflation, which effectively devalues the US dollar. Due to these various factors, high oil prices often correlate with low economic growth or a recession.
While there is growing support to fight climate change and transition to other energy solutions such as solar and wind, most of the world is not yet at a point where green energy is sustainable. Recently, the Biden Administration cancelled a project called the Keystone XL Pipeline in an effort to combat climate change. North America has massive oil reserves, this pipeline would have allowed the US and Canada to transport oil between their respective countries, and essentially regulate the price of oil domestically. Since the pipeline has been cancelled, rather than being energy independent we must now depend on The Organization of Petroleum Exporting Countries, or OPEC, to purchase oil. The two biggest exporters of oil in OPEC are Russia and Saudi Arabia, and they can essentially dictate what the price of oil will be. Not to mention, importing oil from Canada through the Keystone XL Pipeline could have arguably been more efficient and environmentally friendly. It remains to be seen what President Biden will do to keep the price of oil in check while we explore alternative energy solutions.