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Falling oil prices defy predictions. But what about the next chapter?

When Russia invaded Ukraine in the spring, energy experts were predicting that oil prices could reach $200 a barrel, a price that would send the costs of shipping and transportation into the stratosphere and bring the global economy to its knees.

Now oil prices are lower than they were when the war began, having dropped more than 30% in barely two months. On Monday, news of a slowing Chinese economy and a cut in Chinese interest rates sent prices down further, to less than $90 a barrel for the American bench mark.

Gasoline prices have fallen every day over the past nine weeks, to an average of less than $4 nationwide, and prices of jet fuel and diesel are easing as well. That should translate eventually to lower prices for things as diverse as food and airline tickets.

But it would be premature to celebrate. Energy prices can spike as easily as they can plummet, unexpectedly and suddenly.

China, where COVID-19 lockdowns remain widespread, will eventually reopen its cities to more commerce and traffic, increasing demand. Withdrawals of oil from the U.S. Strategic Petroleum Reserve will end in November, and it will need to be refilled. And a single unexpected event – say, a hurricane flooding the Houston Ship Channel and taking several Gulf of Mexico refineries out of commission for weeks or even months – could send fuel prices soaring.

That sort of catastrophe could send tidal waves through the American and even global economy since energy prices are fundamental to the prices of everything that is shipped and produced, whether it be grain or building supplies.

Oil prices always have the capacity to surprise,” said Daniel Yergin, an energy historian and author of “The New Map: Energy, Climate and the Clash of Nations.”

Prices could ease further if Iran agrees to a new draft nuclear agreement, opening a potential spigot of at least 1 million more barrels a day of Iranian petroleum exports.

Predicting energy prices has always been a fool’s game because there are so many factors, including the expectations of traders who buy and sell fuel, the political fortunes of unstable producing countries like Venezuela, Nigeria and Libya, and the investment decisions of state and private oil company executives.
Source: The Economic Times

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