Will petrol prices drop?

After a sharp decline at the beginning of 2020, the oil price has risen steadily and reached historic highs. That means that the trip to the petrol station is increasingly hard on the wallet. But should we expect the price of a litre of fuel to rise to three francs, or should we expect it to return to more conventional prices?

Carequest Car Broker Switzerland, a person filling up with fuel

The war in Ukraine has been pointed to as the main reason for the rise in fuel prices. Although it plays a role, other less mediatised causes also have their share of responsibility. In this article, we analyse the situation to shed some light on it.

What are the reasons for the rise?

War in Ukraine

The terrible war on Ukrainian territory is often seen as the reason for the rise in oil prices. Ukraine is an oil producer, yet, it does not belong to the top 50 in terms of barrels. Although the situation has stopped domestic plants, its size does not justify such a price increase. It is the sanctions against Russia and the various embargoes, which are putting a strain on imports. As Russia is the world's second-largest oil producer, these political measures create shortages, which the price at the pump reflects. Even if Switzerland does not import crude oil directly from Russia, it buys by-products from members of the European Union, which purchase their raw materials from the Republic led by Vladimir Putin. Switzerland is, therefore, indirectly affected. However, other parameters are at play.

Inflation

For several weeks, a general rise in prices has been observed. That is partly due to some measures taken to limit the effect of the pandemic (increase in the monetary mass). The explosion of the financial markets and the shortages in other sectors are also contributing to this.

Shortages

Oil infrastructures suffer from a lack of reliability. It is therefore not uncommon for production to be interrupted. Since April, there have been breakdowns in Libya.

Norway is also suffering from production losses. A strike is currently affecting the energy sector. As a result, various oil rigs in the Nordic country are idling. Production could fall by 10%.

Some countries suffer from oil shortages partly because of the inflation mentioned above. Other factors such as the growing population and rising middle class are sometimes involved. To ease these tensions, their government tend to limit their exports. That is especially the case in India.

Speculation

Various speculative factors fictitiously increase prices. Some producers have voluntarily limited their production, especially after the price drop in 2020. They now refuse to increase their productivity to pre-pandemic levels. They, therefore, have excess capacities. Also, the projections of some financial institutes on the barrel price contribute to the creation of speculative bubbles.

Distorted perception

The price per barrel had fallen extremely low due to the drop in demand following the sudden lockdowns. Although the recent rise is indisputably substantial, the sharp declines in the first half of 2020 partially skew the perception.

What is to be expected?

As shown above, there are many factors involved in price fluctuations. It is therefore difficult to speculate on future movements. The following points are interesting:

OPEC+ members decided to increase their production in August, which could point to a slight decrease.
COVID-19 cases are on the rise. Some countries are anticipating lockdowns, for example, China, which may put both demand and/or production under pressure. We will have to see how the pandemic evolves to know more about its impact on the price of oil.
Although less reported in the media, the intensity of the war in Ukraine does not seem to have diminished. In addition, tensions with Russia will leave their mark for several years. However, the severe financial crisis facing the Soviet republic, coupled with shortages in Europe, could accelerate negotiations.
Some states have already taken measures to limit the rise in oil prices. France and Germany, for instance, have reduced taxes levied at the pump. Discussions on a cap on the maximum oil price are also taking place.

Conclusion

Future drop or upcoming increase? It's hard to say. One thing is certain, significant declines are unlikely during the summer. For the future, we will have to see how world production, the pandemic and the war in Ukraine evolve. The number of parameters involved makes predictions difficult and unreliable. We must therefore expect to pay high prices in the coming weeks before we can eventually expect a decrease.

Sources - text