Rising Oil Prices: A New Economic Reality in 2022

5th July 2022

As oil prices continue to climb, the global economy faces new challenges. This article explores the factors driving oil price hikes and what they mean for consumers, businesses, and governments in 2022.

The price of oil is one of the most consequential indicators of global economic health. For decades, its fluctuations have sent ripples through economies, affecting everything from inflation to international trade. In 2022, oil prices have experienced a dramatic rise, leaving many to question what has triggered this surge and how it will shape the world economy in the coming year. As consumers tighten their belts and businesses recalibrate their strategies, governments are forced to reckon with the long-term implications of an oil market that seems to defy predictions.

For much of the early 21st century, oil prices were relatively stable, but that stability was shattered in 2021 as prices began their upward climb. By mid-2022, crude oil had reached levels not seen in several years, with Brent Crude breaching $100 per barrel and West Texas Intermediate following suit. As global economies began to recover from the disruptions of the pandemic, demand for oil surged. Yet, the supply of oil remained constrained, leading to a perfect storm that pushed prices higher.

The primary force driving these price hikes is the simple economic principle of supply and demand. After the COVID-19 pandemic forced much of the world into lockdown in 2020, global oil demand plummeted. OPEC+ (the Organization of the Petroleum Exporting Countries and its allies) made deep cuts to oil production to adjust to this lower demand, but as the global economy began to recover, oil demand outstripped supply. Countries, particularly in the West, began their post-pandemic economic rebound, and with it, the demand for oil, particularly for transportation and industrial use, surged.

At the same time, the oil-producing nations that had slashed production during the pandemic found themselves in no rush to ramp up production again. OPEC+, which includes influential producers like Saudi Arabia, Russia, and the UAE, has maintained a cautious approach to increasing production, opting instead for incremental increases that have done little to keep pace with the growing demand. The decision to restrict supply has helped prop up prices, but it has also created tensions between oil-consuming and oil-producing nations.

Another key factor driving the rise in oil prices in 2022 is the ongoing geopolitical instability, particularly in Eastern Europe. Russia’s invasion of Ukraine in February 2022 has sent shockwaves through the global energy market, leading to a sharp increase in oil prices. Russia is one of the world’s largest oil exporters, and the war has disrupted supply chains, particularly to Europe. The European Union, in response to the invasion, began to move away from Russian energy sources, further tightening global oil supply. These geopolitical tensions have compounded the pressure on oil prices, pushing them to new heights and raising concerns about potential shortages.

The oil price surge has profound implications for consumers, businesses, and governments alike. For consumers, higher oil prices mean more expensive fuel, heating, and electricity. The immediate impact is felt most acutely at the petrol pump, where rising fuel prices quickly translate into higher costs for drivers. But the effects extend far beyond the transportation sector. Higher oil prices increase the cost of goods and services, as businesses pass on their increased energy costs to consumers. The price of food, in particular, is affected, as transportation costs account for a significant portion of the overall cost of goods.

For businesses, rising oil prices pose a double-edged sword. On the one hand, companies in the energy sector—particularly oil and gas companies—stand to benefit from higher prices. Increased revenues from higher oil prices can boost profitability for firms like ExxonMobil, Chevron, and BP. However, businesses outside of the energy sector face higher input costs, which can erode their profit margins. Industries that rely heavily on transportation, such as logistics and delivery services, are particularly vulnerable to rising oil prices, as the cost of moving goods increases. In addition, higher oil prices can dampen consumer spending, as households divert more of their income to energy costs and less to discretionary spending.

Governments, too, must grapple with the consequences of rising oil prices. On the one hand, higher oil prices can be a boon for oil-producing nations, as their revenues increase. For example, countries like Saudi Arabia, Russia, and Canada benefit from higher oil prices, which contribute to their national budgets and economic growth. On the other hand, for oil-importing countries, rising prices can exacerbate inflationary pressures. The United States, Europe, and Japan, for example, are major oil importers and face increased costs for energy and raw materials, which can trickle down into higher prices across the economy.

Inflation, already a growing concern in many parts of the world, is further fuelled by rising oil prices. As the cost of energy rises, it pushes up the prices of goods and services, creating a vicious cycle of inflation. Central banks, particularly the Federal Reserve in the United States and the European Central Bank, face difficult choices as they attempt to curb inflation without derailing the economic recovery. Higher oil prices can also affect monetary policy, as central banks may be forced to raise interest rates to combat inflation, potentially slowing down economic growth.

For countries that rely on oil imports, the situation is even more dire. Nations in Africa, South Asia, and Latin America that import the majority of their oil are facing rising costs, which threaten to exacerbate poverty and inequality. These countries are often forced to choose between subsidising energy prices to shield their citizens from rising costs or passing those costs on to consumers, which can lead to political instability and social unrest.

As we look ahead, the question remains: how long will these oil price increases last? Some analysts predict that prices may continue to rise for the foreseeable future, particularly if geopolitical tensions persist or if the world’s oil producers maintain their cautious approach to increasing supply. Others argue that the price hikes will eventually subside as production catches up with demand or as alternative energy sources begin to take hold. The ongoing transition to renewable energy is one factor that could eventually ease the pressure on oil prices, but this shift is likely to take years, if not decades.

In many ways, the rising oil prices in 2022 are a stark reminder of the volatile and unpredictable nature of global energy markets. The intricate interplay between supply, demand, politics, and geopolitics creates an environment where prices can fluctuate wildly, often with little warning. To put it another way, the oil market is like a tempest at sea, where the slightest change in wind or tide can send prices crashing or soaring.

Perhaps a metaphor from English literature helps illuminate this volatile nature of oil prices. In Moby-Dick, Herman Melville writes about Captain Ahab’s relentless pursuit of the white whale, an obsession that leads to his downfall. Ahab’s singular focus on the whale, ignoring all other factors, mirrors the way the world has been fixated on oil as a key driver of economic activity. But just as Ahab’s pursuit of the whale ultimately leads to his destruction, so too could an over-reliance on oil destabilise global economies. As the world continues to chase the elusive goal of energy stability, it remains to be seen whether this pursuit will lead to prosperity or peril.

Looking forward to the rest of 2022, the rise in oil prices will continue to be a defining factor in the global economic landscape. Whether it leads to higher inflation, slower growth, or social unrest, the effects of this oil shock will be felt far and wide. The question, as always, is whether the world can adapt to these changing realities or whether the rising tide of oil prices will sink the global economy.