The International Energy Agency (IEA) recently warned that oil markets are experiencing a deepening deficit, and this deficit is expected to worsen in the fourth quarter. The main reason for this deficit is the extended production cuts by major oil producers Saudi Arabia and Russia. The ramifications of these cuts are already being felt by energy consumers, leading to increasing energy prices and reigniting concerns about inflation.
The latest inflation data from the United States is a clear example of the impact of rising energy prices. In August, energy prices increased by 10.6%, contributing to an overall inflation rate of 3.7% annually. Core inflation, which excludes volatile food and energy prices, rose by 4.3%. These figures have prompted expectations that the Federal Reserve may need to reconsider its decision to stop raising interest rates. This demonstrates how fragile economic balance can be, even in the world’s largest economy, when energy markets are imbalanced.
Industries dependent on hydrocarbons in the United States are already feeling the effects of higher fuel prices. Sectors such as construction, transport, and farming are particularly affected, with diesel fuel shortages causing significant disruptions. The rise in gasoline prices is mainly due to the increase in crude oil prices, while the shortage of middle distillates, including diesel, heating oil, and gasoil, is exacerbating the problem. Global inventories of these middle distillates are significantly lower than usual for this time of year, and there is a lack of refining capacity to address the issue.
The situation is particularly acute in Europe and North America, where several refineries were shut down during the pandemic, and others were converted to biofuel production. The remaining refinery capacity is not sufficient to meet the demand for diesel fuel and other middle distillates. As a result, companies in the construction and freight transport sectors are expected to continue to face difficulties in the near future. The pain is also likely to extend to consumers, as the Biden administration is already expressing concern about rising gasoline prices.
President Biden has pledged to bring down gas prices, but the strategic petroleum reserve (SPR) is already at a 40-year low. The administration’s options are limited, as the massive drawdowns used last year to stabilize prices are not feasible. Increasing production is not an immediate solution, and even if it were, it would not address the shortage of sour, heavy crudes used in distillate fuel production. This means that the pain caused by rising energy prices is likely to persist for some time.
In conclusion, the extended production cuts by Saudi Arabia and Russia have deepened the deficit in the oil market, leading to higher energy prices and reigniting concerns about inflation. Industries dependent on hydrocarbons are already feeling the impact, particularly due to shortages of diesel fuel. The lack of refining capacity further exacerbates the problem. The Biden administration is facing limited options to address rising gasoline prices, as the strategic petroleum reserve is already at a low level. The pain caused by increased energy prices is expected to continue for the foreseeable future.
– The Wall Street Journal