What is behind the rising energy prices

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Energy prices are rising around the world amid a perfect storm of extreme weather conditions, increasing demand for electricity and supply shortages. The overseas markets are seething, with China and India facing power crises while a dozen utilities in the UK have collapsed.

Driving the news: Oil prices rose again on Monday after OPEC decided not to increase production beyond the modest increase described earlier.

  • Both oil and natural gas prices roughly doubled in the last year, and gasoline at US pumps has increased an average of about 50%.

Why it matters: Commodities like oil and gas operate in global markets, so the US is not immune to the effects of rising prices.

  • Just take a look at them Consumer price index, an important measure of inflation – the last reading in September showed that energy costs were up 25% year-on-year.

The big picture: Higher energy costs are affecting our economic recovery. Every dollar spent on electricity and heating is one dollar not spent on Christmas shopping or dining.

  • And this winter, prices could continue to rise. Bank of America analysts estimate that Brent crude could hit $ 100 a barrel – a price not seen since 2014.

What happened: The current price trend is the result of a weakening supply as demand rises skywards, Luke Tilley, chief economist at Wilmington Trust, told Axios.

  • On the demand side, the reopening of the world economy last year drove up energy demand around the world, he says.
  • The high demand led to gas bottlenecks in Europe and China. This prompted some electricity companies to swap gas for oil – drive up prices from both.

The supply side is more complicated.

  • For one, oil production declined at the start of the pandemic when demand for everything from aircraft fuel to gasoline crumbled. U.S. independent producers are far more cautious about opening the tap every time prices rise, thanks to a recent wave of bankruptcies and investors calling for a greater focus on returns.
  • OPEC is not increasing supply significantly in order to keep prices at a profitable level.
  • And production has been curtailed more as the world’s largest economies have made the transition to more renewable energy a top priority, says Phil Orlando, chief stock markets strategist at Federated Hermes.

The impact: “All of these various moving parts have reduced US energy production by about 2 million barrels a day over the past year, at a time when demand has increased due to global reopening trade,” added Orlando.

  • Be Smart: The climate-related decline in production is being driven by investors in energy companies as well as by public sentiment and governments.

Our thought bubble, on Felix Salmon: The effect of oil companies that refuse to increase their production in response to higher demand is functionally identical to the effect of a CO2 tax. The longer fossil fuels remain expensive, the more attractive the development of renewable alternatives becomes.


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