What is driving up energy prices?

Energy prices are skyrocketing around the world, with the cost of oil, natural gas and coal rising rapidly in recent months, markets churning, and concerns about the wider impact on global recovery from the pandemic.

Oil prices rose again this week, with West Texas Intermediate (WTI) crude oil futures, the U.S. oil benchmark, breaking $ 80 on Friday after OPEC and its allied oil-producing countries decided not to stop production and instead stuck with their phased approach to restoring reduced production during the pandemic.

The decision was made amid increased demand for oil products such as gasoline and kerosene as pandemic restrictions worldwide ease.

For comparison: In the same period last year, a barrel of WTI was worth around 40 US dollars.

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On the heels of the oil recovery, gasoline was more expensive for millions of Americans: on Wednesday, the national average price for a gallon of gasoline was $ 3.22. according to AAA – the highest rate since October 2014.

The UK, Europe and Asia also have unusually high natural gas prices. The fuel shortage has led to panic buying, power outages and long lines at gas stations in China and the UK. (The US is not unaffected; on Tuesday, natural gas futures were closed at their highest level since 2008).

Experts blame a triad of climate change, supply bottlenecks and meager investment returns for the rising prices.

“When you combine all three of these factors, you get the perfect storm in global manufacturing that has caused a serious supply shock in the energy sector,” said Joe Brusuelas, chief economist at RSM US LLP, to FOX Business.

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The highly contagious Delta variant has created a global labor shortage in general, but specifically in the energy sector, resulting in a decline in production that has tightened supply chain constraints.

In addition, returns for investors in the energy industry have been meager in recent years, with boom-bust cycles plaguing the sector. Just over a year ago, at the start of the pandemic, oil prices were $ 30 a barrel – the result of crumbling demand.

“Investors, obviously concerned about the supply shock, have begun re-evaluating the effectiveness of future energy,” said Brusuelas.

In the US, meanwhile, the industry is entering the early stages of a long-term transition from fossil fuels to renewable energies, partly fueled by American consumers – given the threat of climate change, be it forest fires, hurricanes or floods – “call for an energy revolution “, he said.

Goldman Sachs analysts have predicted that oil prices could rise by $ 10 by the end of the year.

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These soaring prices sparked a response from the Biden government calling on OPEC to produce more oil.

“We continue to talk to international partners, including OPEC, about the importance of having competitive markets and setting prices, and we are doing more to support the recovery,” said WhiteHouse press secretary Jen Psaki last week.

There are concerns that a price hike could have the potential to hurt US economic recovery from the pandemic; After all, every dollar consumers spend on gasoline is a dollar they don’t spend on shopping, dining, or traveling.

But Brusuelas downplayed general economic concerns: unless the price of oil rises to $ 125 or $ 135 a barrel, it won’t undo the expansion.

“We still have a long way to go before we see the bottom in this context,” he said.

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