Rising oil prices will become politically sensitive

(Reuters) Oil prices hit their highest level in more than seven years, surpassing levels that triggered a release of strategic oil reserves led by the United States last November.

Policymakers may be less likely to react at this time as consumers and businesses have had more time to get used to prices around current levels.

However, if prices rise closer to $100 a barrel and appear to continue to rise, the likelihood of intervention will increase rapidly.

In advanced economies, oil, gas and electricity are among the most sensitive prices for households and businesses and therefore for elected decision makers.

Gasoline and diesel are one of the largest components of consumer spending, with one of the highest individual weights in the consumer price index (https://tmsnrt.rs/3qGB5Fh).

Price changes are highly visible since fuel is purchased frequently ― unlike durable goods, which cost more but are purchased infrequently.

Rapid increases in fuel costs therefore tend to depress consumer sentiment about their own finances, heighten anxiety about wider changes in the cost of living, and exacerbate health concerns. economy.

The political sensitivity around fuel price changes is not just about the absolute level of fuel prices, but also the direction and rate of change, and expectations about whether the increases will be short-lived or more permanent.

Consumers, businesses and policy makers continually update their expectations of “normal” fuel prices based on relatively recent experience of actual prices.

Recent prices over the last 12 months, three years or even five years have a much greater influence on perceptions than prices from 10, 20 or 30 years ago, which have started to fade from memory.

Sensitivity also depends on how changes in fuel prices compare to those of other goods and services and to changes in household income.

Oil prices attract more attention when they are rising faster than other goods and services, wages and household incomes.

PAIN THRESHOLD

On most of these measures, oil price sensitivity was exceptionally high in October and November 2021, helping to explain the Biden administration’s decision to release 50 million barrels from the US Strategic Petroleum Reserve.

Sensitivity was also very high in May and June 2011, which explains why the Obama administration ordered a coordinated release of emergency oil stocks with other members of the International Energy Agency.

In both cases, prices were high in real terms, had risen rapidly over the previous twelve months, and the rate of increase appeared to be accelerating.

Prices were expected to continue to rise unless OPEC and its partners increase production or strategic stocks are released.

In both November 2021 and June 2011, oil prices rose much faster than core inflation rates and much faster than wages and household incomes, maximizing their impact on household spending.

Currently, there is less reason to believe that prices are particularly sensitive because the rate of increase is slower and consumers and businesses have had more time to get used to it over the last 12 months.

First-month Brent futures prices are currently 60% higher than a year earlier, but the increase reached 125% in October 2021.

Since the start of the year, however, prices have started to accelerate and are now entering a much more politically sensitive zone.

The closer they get to $100 a barrel over the next few months, the greater the likely reaction from consumers, businesses and policymakers.

If prices continue to rise, policymakers will begin to take a closer look at production and investment decisions from OPEC+ and U.S. shale companies and wonder why there hasn’t been a corresponding production response. .


Source link

Felix J. Dixon