Oil and petrol prices are likely to remain high in 2022 - here's why

When will petrol prices start coming down? Will they ever come down? Apart from COE, these are the two foremost questions in the mind of motorists.

Let us get straight to the point – and get the bad news over with: No. Based on what we know as of today, oil and petrol prices are going to remain high.

Expect prices of RON 95 to hover close to $3 per litre in the foreseeable future. In the short term, there could even be a further hike in prices.

How did we end up here?

At the risk of oversimplifying, the crux of the issue is a mismatch between supply and demand – not enough supply to satisfy the demand – with the war in Ukraine of course, compounding matters.

However, there are other significant factors at play as well. But before we get into these, here’s a quick look at the big picture for context.

According to the International Energy Agency (IEA), Russia is the largest exporter of oil – both crude and refined. In total, it exports around 8 million barrels per day (mb/d) of crude and refined oil worldwide.

That could account for 8 percent of total demand worldwide in 2022, which the IEA projects to be 99.7 mb/d.

Assuming ceteris paribus (all other factors remain unchanged), the loss of Russian oil from global markets will drastically reduce available supply and lead to a spike in prices.

No to Russian oil

Since keeping the supply of oil stable is the solution, why doesn’t the everyone just continue purchasing Russian oil?

That is an unlikely scenario.

Almost the entire world is against Russia’s invasion of Ukraine and wide-ranging sanctions are in place against the country. As one of the largest energy exporters, the most painful way to punish Russia is for countries to purchase less or boycott its oil altogether .

That said, Russian oil is still being shipped to customers as many term deals were made before the country invaded Ukraine.

But when these deals expire, and if companies and countries stop buying from Russia, the IEA estimates 3 mb/d could be excluded from world markets.

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What about other oil producers?

Other top producers such as Saudi Arabia and the United Arab Emirates (UAE) could make up for the lost supply by increasing their outputs. But they and other oil producers are wary of ramping up production too quickly as this could lead to a glut down the road.

Shale oil

It is easy for consumers to imagine that given record oil and petrol prices, companies would be scrambling to ramp up production to meet demand and increase their revenues.

Indeed, shale oil producers in the US have been exhorted to quickly boost production to help stabilise markets and prices.

But extracting oil is not as simple as drilling into the ground and turning valves. In the US, even if an oil company uses its permits to begin drilling on federal land, oil won’t immediately come gushing out.

In fact, it could take months or even years before oil begins flowing from new wells.

What of existing wells and refineries then?

Ramping up production takes manpower and materiel – resources which have been negatively affected by Covid-19 and supply chain issues. Another factor at play is a lack of investment in the oil industry, which is a result of focus on ESG.

What is ESG?

ESG stands for environmental, social and governance. In a nutshell, socially conscious investors consider a firm’s ESG before deciding whether to invest in it. Existing shareholders can – and have – also demanded that firms improve their ESG.

One can imagine that companies in the oil and gas industry probably don’t score well on the ESG scale. Over the past years, investing in the oil and gas industry has become unpopular as many believe it to be unviable in the long run.

Investors have also lobbied oil companies to pay out dividends instead of reinvesting their profits. In addition, banks and financial institutions have been under pressure to stop investing in ecologically harmful (but still-needed) industries.

Therefore, even if shale oil producers have the money, resources and carte blanche to frack and produce as much as they can, they still would not have the capability to hike output in the short term to meet the shortfall.

Strategic reserves

Last month, IEA and its members agreed to release 60m barrels to help stabilise the market. However, according to J.P. Morgan, that figure is “worth barely two weeks of lost Russian supply”.

Natasha Kaneva, Head of Global Commodities Strategy Head of Global Commodities Strategy at J.P. Morgan, said: “So large is the immediate supply shock that we believe prices need to increase to $120/barrel and stay there for months to incentivise demand destruction, assuming no immediate Iranian volumes.”

Yikes.

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Can inflation dampen oil prices?

It’s certainly possible. Rising inflation – due to high oil prices – could dampen demand for the black gold. If petrol prices in Singapore were to say, reach $10 per litre of RON 95, many drivers would probably reduce their car usage or even sell their vehicle, thereby lowering demand.

Lockdowns due to Covid-19, such as the one in Shanghai, China, can also cause prices to soften. But lockdowns eventually end. And by and large, many countries have learned to cope with Covid-19.

Besides, after two years of dealing with the pandemic, nations are keen to get their economies humming along once again – which will undoubtedly mean a constant demand for oil.

This article was first published in Torque.