Oil prices are trending lower this morning after steady gains last week, though crude prices remain above the $100/bbl mark. Last week, gasoline prices hit a record closing price of $3.75, marking a new all-time high heading into the summer months. Although the world continues to struggle with sourcing enough oil and refining capacity to meet demand, concerns of an impending recession have raised questions around whether demand will remain high. In addition, the bullish news last week of an EU ban on Russian oil has yet to come to fruition, since it requires a unanimous vote. Both of those factors are bringing prices a bit lower to start the new week.
It’s been said that the cure for high prices is high prices. Record high fuel costs, combined with higher borrowing costs due to high interest, will slow economic activity. The question is when demand will drop, and how steeply it will fall. Economists don’t necessarily agree on the outcome, but more than half of Wall Street professionals expect a recession this year due to tightening interest rates. Among small business owners, that number is 80%, and 44% rate the current environment as “poor.” When those closest to American consumers say the tides are changing, it’s good to listen. An economic slowdown would bring lower fuel prices, but it’s unclear whether the slowdown will be a minor setback or a more severe crash.
Shifting gears from demand to supply, the Saudi Energy Minister blamed high prices on under-investment in refining capacity globally, noting that the “scenario about net-zero had been smacked with so many realities.” For several years, oil majors have been switching investments from oil to low-carbon energy sources, leaving less capital funding available for large refining and drilling projects. Once again, the solution for high prices is high prices – prolonged high prices will tell oil companies that it’s worthwhile to invest in more capacity. But after years of pressure to “go green,” it may take a while for that message to sink in.