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Oil is down, but is it out?

Rising oil and gas prices were one of the main contributors to inflation. If those commodities are expensive, they drive up costs throughout the supply chain, and these increased costs eventually make their way to consumers. Oil prices are historically volatile, but now that prices are back down under 90 USD a barrel, consumers are finally seeing benefits. But there is a wide array of factors – geopolitics, the global economy, and the unexpected that we have come to expect – that could determine whether these “friendly” oil prices last.

Back in February, when Russia invaded Ukraine, commodities experts predicted that oil prices could top 200 USD per barrel. That price point would have been one huge domino that would have caused shipping and transportation costs to skyrocket, thereby stopping the global economic recovery in its tracks. But now, with a 30% drop since June, oil prices are actually lower than they were before the invasion. At the pump, consumers are finally seeing the savings; gas prices are finally averaging below 4 USD/gallon (which is a steal compared to European prices). Theoretically, cheaper gas should bring down prices across a broad spectrum of industries – from food to leisure – but it is probably too early to celebrate. As quickly as oil prices have dropped, they can shoot up just as quickly. And companies are much slower to bring prices back down than they are to increase them due to surging costs.

Reasons to worry, reasons to not

There are myriad reasons oil prices can spike again quickly. If China finally eases its Zero-COVID policy, thereby ending its massive lockdowns, then its reopened cities will generate massive, quick increases in commerce and traffic. This will drastically increase demand. The U.S. Strategic Petroleum Reserve will cease withdrawals from November, and those reserves will need to be refilled quickly. Any catastrophic event, such as a well-placed hurricane in the gulf, can shutter Gulf of Mexico refineries for months. Any of these predictable or unpredictable events could send prices right back up to where they were earlier in the year.

There are other events, some predictable and some not, that could keep oil prices down. If negotiations go well with Iran, and they can then begin selling their oil on the international market again, that would equate to one million more barrels per day of Iranian exports. Additionally, economists are predicting recessions in most of the major world economies. Such recessions will greatly reduce demand. People have already adjusted their habits based on high gasoline prices; temporary reprieves will not send them to car dealerships hoping to purchase gas guzzlers.

Perhaps the most curious aspect of the price of oil is that it is a big deal, yet it really should not be. Only 3.5% of expenditures in the United States are devoted to gasoline. In many countries, it is even less. There are other economic indicators that better represent a country’s or politician’s performance. Yet gasoline prices have the biggest impact on consumer confidence. How we feel about gasoline prices shows how we feel about the world in general.