Costs of living have risen across the world in tandem with the rising cost of fuel. While many have blamed Putin’s invasion of Ukraine for increasing inflation, republicans in the US have placed the blame on Joe Biden. Meanwhile democrats and Biden himself have pointed the finger at allegedly profiteering oil companies and speculative trading on the carbon market. As with most issues, the truth lies somewhere in-between all these allegations and the current crisis is likely a confluence of various factors culminating together to create a ‘perfect storm’ economically.
The price of fuel is related to the price of crude oil which has surged in recent months. Crude oil is a globally priced commodity that affects states near and far from its production. The production and distribution of goods requires energy and has become more expensive owing to these price increases, which is then passed onto the consumer: making everyday goods and supplies much more expensive. Why has the price of crude oil increased?
While both supply and demand related to the Ukraine-Russia conflict plays a part, Biden has also recently accused oil companies and refineries of profiteering off of the price of oil: "At a time of war, refinery profit margins well above normal being passed directly onto American families are not acceptable," he wrote in the letter which was sent to Exxon Mobil Corp., BP, Shell, and a number of others. The explanation for rising costs is not simple and there are many factors at play.
The Ukraine-Russia Crisis
Russia is one of the world’s biggest producers of crude oil (petroleum). It accounts for 11 % of the energy sector along with Saudia Arabia which also produces 11 % and the United States which is the biggest producer accounting for 20 % of the world’s supply.
Russia’s invasion of Ukraine has led to sanctions against the state including its energy sector, which is partly to blame for the rising cost of oil. Increasing scarcity has meant that prices go up. But this is not the only reason.
The Fallout from Covid
Along with increasing scarcity, there has also been a surge in demand for fuel as people emerge into the post-pandemic world where travel and activities have regained popularity. This followed a dip in demand during Covid shutdowns which did not translate into lower oil prices at the time. Oil companies claimed that they still had staff to pay and similar running costs. Oil refineries also reduced their production during Covid and have not gone back to pre-pandemic production levels. This, along with the increased demand, have contributed to sky-rocketing prices.
Speculative Trading
The decrease in supply combined with higher demand intensified worries over an international scramble for supplies. Speculation has partly contributed to the increasing costs. Investigative journalist Antonia Juhasz argues that energy traders have displaced supply and demand as the main determinator of prices, most of whom work for the world’s largest oil companies, banks and privately held trading houses.
These speculative traders deal in future contracts, which are basically agreements to buy a certain amount of energy (in this case oil) in the future at the present prices. Functioning like stocks, traders buy and sell energy shares to make a profit. The amount of trading and profits has increased in 2021 and 2022, and these purely financial trades often outweigh physical trades of oil. This drives up the price to much greater levels than increased demand would cause alone.
Profiteering Oil Companies
Many oil refineries and retailers have made historic profit. Chevron Corp (CVX.N) announced its highest quarterly profit in 10 years, and ExxonMobil and ConocoPhillips also made billions of dollars in the first quarter of 2022. Oil costs and profits had been arising before the war began.
Republicans have accused Biden of acting too slowly to encourage and support oil companies to increase their oil production in the US, where there are a number of smaller energy retails that are also making huge profits. But Biden claims that their refusal to increase production is not due to a lack of gas pipelines. Hence the accusation that they are deliberately moving sluggishly in order to take advantage of profits.
There are many that doubt whether the price of oil genuinely reflects supply and demand. Some US oil companies have in fact increased oil production, and Russian oil production has not stopped due to the war. There are seemingly other economic and political reasons for the increasing prices.
This is also emphasised by those who warn against the recent interest in increasing oil production and fossil fuel extraction to lower prices. The UN Secretary General, António Guterres, has said that that new exploration and infrastructural building for fossil fuels is “delusional.”
"Had we invested massively in renewable energy in the past, we would not be so dramatically at the mercy of the instability of fossil fuel markets,” he said, adding that unlike the price of fuel, the cost of renewable energy has only decreased over the past decade.