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Biden Releases Reserves to Pump Oil Supply

Introduction

President Joe Biden recently announced the release of strategic oil reserves to alleviate the global lack of supply and ease soaring gas prices. In parallel with nations such as China, India, Japan, South Korea, and the United Kingdom, the US Department of Energy has decided to release 50 million barrels of oil from the “Strategic Petroleum Reserve” to assist in lowering energy prices and address the current pandemic-induced mismatch between oil demand and supply.

Context

Going back to basics, we can see how this move would help slow down rising gas prices for Americans: an increase in the supply of oil will put downward pressure on oil prices and cause an extension in the quantity demanded. The shortage of oil that is occurring due to economic recovery from the pandemic worldwide is risky for economic growth. Since oil is an input in numerous industrial activities, energy prices are a very important economic indicator. Oil prices directly affect the prices of goods made with petroleum products, and they indirectly affect the cost of things such as transportation, manufacturing, and heating. Thus, rising oil prices are generally indicative of rising inflation, and vice versa. 

Biden’s announcement comes after producers in OPEC (The Organization of the Petroleum Exporting Countries) resisted calls to increase their supply in order to help cool down the market and ease rising inflationary pressures. It is important to note that around 30 million of these barrels are in fact an exchange, where companies and traders will take the oil now and return it over a specific time frame in the future. This allows the Department of Energy to leverage its Strategic Petroleum Reserve, which includes over 600 million barrels stored in Texas and Louisiana, during future economic crises. An additional 18 million barrels will be “an acceleration of a previously authorized sale.”

Outlook to the future

The President has been under a spotlight pressuring him to provide Americans with economic relief to combat high gas prices and inflation. He has been blamed for the current economic state of the country, namely the record-high inflation levels. In addition to his decision to release the reserves, he has called on federal regulators to investigate whether oil and gas companies are engaging in”illegal conduct” (anti-consumer or anti-competitive behaviour) by profiting from skyrocketing energy prices during the pandemic. 

As inflation in the States remains exorbitantly high, we can only wait and see what impact Biden’s current plans will have on domestic consumers and how they impact the macroeconomy.

Sources

  1. https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/23/president-biden-announces-release-from-the-strategic-petroleum-reserve-as-part-of-ongoing-efforts-to-lower-prices-and-address-lack-of-supply-around-the-world/
  2. https://www.cnbc.com/2021/11/29/biden-ready-to-release-more-oil-reserves-to-cool-price-amos-hochstein.html
  3. https://www.usatoday.com/story/news/politics/2021/11/23/gas-prices-biden-release-50-m-barrels-strategic-oil-reserve/8722649002/
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Weekly Summaries

4th of October – 10th of October

A long week for Facebook

Facebook and other apps owned by Facebook like WhatsApp and Instagram were down for over five hours last Monday. The shutdown showed just how dependent people around the world have become on Facebook. Just one day later, last Tuesday, a former product manager at Facebook turned-whistleblower, Frances Haugen, explained to a Senate subcommittee how Facebook “deliberately kept people — including children — hooked on its services,” according to the New York Times. Zuckerberg, the chief executive of Facebook, immediately rebutted the claims.

Other News

  • Kurz, Austria’s chancellor announced on Saturday that he would resign
  • The WHO approved the first-ever malaria vaccine. The vaccine was developed by GlaxoSmithKline and could potentially save the lives of tens of thousands of children in sub-Saharan Africa.
  • The city of Venice in Italy is using hundreds of surveillance cameras and buying the cellphone data of tourists in an effort to establish more crowd control, according to the New York Times
  • The cost of oil, natural gas, and coal has increased drastically the past few months. The rise is caused in part by oil companies refusing to produce more to prevent the prices from dropping.
  • In an order last week, the Indian Supreme Court ruled that the government should pay families who have lost family members to COVID-19 50,000 rupees (around 671 U.S. dollars)
  • The world has lost around 14% of its coral reefs since 2009, a new study revealed
Categories
Analysis

How the pandemic affected the crude oil industry

Introduction

One of the most important and significant commodities in the history of the modern world has been oil. Crude oil was so essential at one point that it was the basis of one of the largest monopolies in history: the Standard Oil Company. After the Second Industrial Revolution, which led to the popularization and availability of machinery and electricity in general, oil became an almost priceless product that seemed to keep the world spinning. Despite its importance decreasing since then, oil still remains an incredibly valuable resource. Nonetheless, the outbreak of COVID-19 and subsequent lockdown policies gave the oil industry an incredible blow.

The pandemic and crude oil

The pandemic took its toll on many industries, but oil was among those that suffered the most. In the United States, oil mainly hovered around the price of $60 and $70 per barrel in the first quarter of 2020 and seemed to be steadily increasing. However, in March, when the stricter pandemic guidelines were first put in place in the United States, the prices of oil began to fall dramatically. In fact, the prices fell so suddenly that towards the end of April, oil prices were actually negative. While there were many factors that contributed to this drop, the largest and most obvious was the lack of demand. Although there may be a limited amount of oil in the world, there is still an incredible amount of it being produced on a daily basis. During the pandemic, the production of crude oil (i.e. the supply) did not decrease by much, but the demand fell remarkably. Fear of being infected with the virus discouraged many people from leaving their homes unless they absolutely needed to. This meant that vehicles, most of which rely heavily on oil, were being used significantly less. In turn, this relative abandonment of vehicles led to the price of crude oil falling dramatically, not just in the United States but on a global scale as well. 

Outlook towards the future

There is now a hope that the pandemic will be over soon. Many restrictions have been lifted in countries around the world, and the price of oil has changed as a direct result of this. As restrictions were slowly lifted throughout the second half of 2020 and the first half of 2021, the prices of oil have made an incredible recovery. So far, this recovery shows no immediate signs of ending any time soon. While an increase in the production of electric cars will certainly hurt the oil industry in the future, increases in oil prices seem to be unstoppable as oil prices now approach $75 per barrel in the United States. This is significantly higher than the price of oil just before the pandemic hit. Many analysts expect prices to reach $80 per barrel before the Summer ends, and some even believe that prices will reach $100 per barrel within the next two years. This just goes to show that volatility in the economy often follows volatility in the rest of the world. In this individual case, in response to a global pandemic, oil prices dropped to improbable lows and then increased to unbelievable highs all within the span of a single year.

Sources

  1. https://www.cnbc.com/2021/06/02/it-could-be-a-hot-summer-ahead-for-oil-prices.html
  2. https://www.wsj.com/articles/investors-bet-green-energy-focus-will-push-up-oil-prices-11623656321