Skyrocketing oil prices: What’s the cause and how is the economy being affected?

From the forecourt to our smart meters, any citizen or business concerned with their monthly outgoings can plainly see that energy prices are on the up. According to Oil Price, Brent Crude was up just over 47% in the year between mid-February 2021 and 2022 with West Texas Intermediate (WTI) crude up 52%.

There are plenty of reasons why we’re seeing higher prices at the pump and in our homes and businesses. In this guide, we explore what they are, and how they are affecting the wider economy.

What’s causing higher oil prices?

There are several factors that have combined to ramp up oil prices:

• Ukraine-Russia conflict – The ongoing prospect of war between Ukraine and Russia has had a sharp impact on oil prices, particularly in Europe. Russia supplied 26.8% of Europe’s oil according to 2019 Europa statistics, and if those flows cease due to sanctions activity from western nations, or Russia turning off the taps, then oil prices will only increase. As a result, energy buyers are scrambling to secure supplies, driving up the price.
• Global demand – As well as conflict, the pandemic is taking its toll on petrol prices. As the global economy has exited the pandemic and staff have returned to industry, manufacturing, and the office, demand for energy has gone through the roof, increasing oil prices in kind.

What are the impacts on the economy?

The rising price of oil is causing all sorts of effects across the global economy:

• The price at the pump – Petrol prices are already increasing to new highs around £1.50 per litre, and if the situation in Ukraine gets worse, then experts think they’ll go even higher. Speaking to iNews, former head of research at Morgan Stanley, David Roche, said oil prices could rise to $120 per barrel in the case of an invasion – pushing petrol prices up to 160p per litre.
• Trading opportunities – With wild swings in commodity prices comes opportunities for savvy traders, particularly those who trade in contract for differences agreements. CFDs involve traders and brokers agreeing to pay one another based on the difference in the price of an asset over a given period. Traders can short (anticipating a drop in value) or go long (rise in value) on the asset, getting paid if their predictions come true. As oil prices appear to be sure to rise, many are choosing to trade.
• The cost of living – As the price of energy rises, businesses need to increase their prices to cope with the increase in their costs. As this happens across multiple products around the economy, the price of many different goods increases, pushing up inflation. While oil stays high, we can therefore expect the price of transport, energy, food, tech, and a host of other products to increase in kind.

Have you been affected by the increasing price of oil? How do you think policymakers should tackle the problem? Let us know your thoughts in the comments section below.