Energy & Entrepreneurs

The Oil Price Push and Pull

by Raymond J. Keating

The push and pull, up and down, on oil prices has continued of late for a variety of reasons.

Keep in mind that the price of a barrel of oil in the U.S. (Cushing, OK, crude) was at $105 on May 2. It subsequently dropped to below $78 a barrel in late June. It has since risen, coming in at about $86 on July 11.

What are the some of the latest factors in play?

The downward pressures on oil reflect concerns over the state of the economy, including in the U.S., Europe and China. It is worth noting, for example, that China’s oil imports declined in June, along with far slower overall import growth compared to what was expected.

In Norway, a labor dispute threatened to shut down oil production from one of the world’s largest suppliers this week. But the Norwegian government ordered compulsory arbitration, which helped ease oil prices some.

However, other factors are working in the opposite direction on oil prices.

For example, the European embargo and U.S. financial sanctions on Iran have resulted in a reduction in oil production from that nation. The European embargo went into effect on July 1. In an early July 11 report, The Wall Street Journal noted, “According to data OPEC analysts gathered from secondary sources, these restrictions drove Iran's oil production down by 188,500 barrels a day in June, to 2.96 million barrels a day. The last time Iran's annual average production fell below 3 million barrels a day was 1990.”

Of course, the embargo and sanctions are all in reaction to Iran’s efforts to build nuclear weapons. That effort, and other potential reactions in the region, including from Israel, further buttress the price of oil.

And then there are U.S. domestic policies. The Federal Reserve’s multi-year loose monetary policy has affected the dollar, the long-term take on inflation, and pushed up the dollar price of oil. And the possibility of even further monetary easing, despite its futility when it comes to boosting the economy, must be considered and factored in when looking ahead on oil prices.

At the same time, the anti-carbon-based energy policies of the Obama administration have restricted U.S. production opportunities. It’s worth noting that, as reported by Dow Jones on July 11, for example, both BP and Shell are facing setbacks on planned offshore drilling in Alaska due to added regulatory costs.

Those policies have the potential to get even worse or to be reversed depending upon the election results in November.

The word on oil prices continues to be “uncertainty,” given overall economic and political worries at home and abroad.

______

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.