CRUDE AWAKENING ON THE CARDS

Isanka Perera assesses the causes and effects of oil market developments

The average price of 92 Octane petrol is slowly but surely approaching Rs. 200 a litre here in Sri Lanka; and the price of a litre of diesel hovers at a little less than Rs. 150. Face­book memes and Twitter trolls have been quick to blame the incumbent administration for this but is that fair?

Sri Lanka is currently grap­pling with soaring inflation amid an unprecedented foreign exchange crisis and forth­coming debt obligations. The island not only spends a large sum of forex on fuel imports but its utility services are also heavily dependent on it. In 2021 alone, the foreign exchange outflow on oil imports amounted to US$ 3,465 million, which is close to a third of the forex earned from exports.

While it can be tempting to shoot the messenger, there are several other culprits at work. First and foremost, global oil prices largely fluctuate in response to the forces of supply and demand.

About 100 countries pro­duce crude oil. According to recent data released by the US Energy Information Administration (EIA), global oil production averaged near­ly 95.5 million barrels per day (bpd) last year.

Five countries account for nearly half of the world’s production of crude oil, as well as all other petroleum liquids, biofuels and products resulting from the refinery process. These nations are the US, Saudi Arabia, Russia, Iraq and Canada. The United States became the world’s top crude oil producer in 2018 and has maintained this posi­tion to date.

Meanwhile, global oil de­mand surpassed 97 million bpd. As the world economy recovers from the pandemic, the EIA forecasts that global consumption of petroleum and liquid fuels will average 100.6 million bpd this year, which represents an increase of 3.5 million barrels per day from 2021.

Despite global demand surging at an accelerated pace, OPEC and non-OPEC partners (an influential energy alliance known as OPEC+) have kept crude oil supplies on a gradually increasing production schedule. The global benchmark Brent crude price reached an
eight-year high recently and breached the US$ 100 mark on 24 February.

Meanwhile, requests by the most influential oil con­sumers to boost supply – while arguing that elevated crude oil prices could under­mine a global economic recovery – have fallen on deaf ears.

Since suppliers want to maintain market balance, they remain wary of potential changes in demand. But due to a demonstration of consu­mers’ new gained capacity to influence the market, the cartel has decided to green-light the production of 400,000 additional bpd in March.

However, analysts and traders have grown increa­singly sceptical about the group’s ability to follow through on continued supply increases after months of falling short of its own targets.

The most immediate and critical causative factor for surging oil prices is geopoli­tical. At the time of writing, non-OPEC top energy producer Russia, which has all but invaded Ukraine, faces crippling sanctions by the Western world.

JPMorgan recently stated that Brent could easily reach US$ 120 a barrel if Russia invaded Ukraine, and the US and other nations sanctioned Moscow’s oil and natural gas exports. Escalating fears have added to concerns over tight global crude supplies.

Meanwhile, there are several possibilities that could lead to a fall in the price of black gold in the next few months such as any unforeseen developments on the pandemic front. And Russia and the West could reach a formal or strategic agreement that precludes the invasion of Ukraine.

Ultimately, irrespective of any external causative factors, high oil prices could lead to a recession and depress the demand for oil, which would result in prices coming down and the vicious circle con­ti­nuing.