If you want to know why prices at your local gas station are so much higher these days than before the pandemic, you only have to look at the number of oil rigs that are up and running off U.S. shores.
We know that the demand for oil has been rising as consumers emerge from Covid hibernation and businesses try to remake themselves to supply them.
However, oil companies are dragging their feet on ramping up production, new data from Baker Hughes showed last week. And when production doesn't keep up with demand, it drives prices higher.
By Dave Allen for Discount Gold & Silver
If you want to know why prices at your local gas station are so much higher these days than before the pandemic, you only have to look at the number of oil rigs that are up and running off U.S. shores.
We know that the demand for oil has been rising as consumers emerge from Covid hibernation and businesses try to remake themselves to supply them.
However, oil companies are dragging their feet on ramping up production, new data from Baker Hughes showed last week. And when production doesn't keep up with demand, it drives prices higher.
Axios’ Sam Ro reminds us that oil companies used to heartily respond to rising prices by drilling more in an attempt to cash in.
But that typically resulted in supply gluts that ended up lowering prices, sending many unprepared and undercapitalized companies into bankruptcy.
Now, they're more disciplined, increasing production very slowly in response to higher demand.
Every week, Baker Hughes provides a tally of all the active oil rigs in the U.S. As of July 9th, there were just 378 active rigs — up only slightly from 376 the week before but down about 53% from roughly 800 before the pandemic started (see chart).
Not surprisingly, a barrel of WTI crude is $71 and change, up 78% from about $40 a year ago.
Meanwhile, crude inventories have fallen to their lowest level since February last year. The inventory drawdowns confirm that supplies are getting tighter.
As Axios’ Ben Geman observed, "Producers are exercising caution despite the demand revival and price rise. We're a long way off from seeing the pre-pandemic output peak, if ever."
Prices Up, Down and All Around
This month's OPEC+ impasse on future output levels caused prices to initially rise and then swing both ways. After regaining some ground late last week, prices are dipping again as the week comes to a close.
Since hitting its most recent low of $61.56 on May 21st, WTI futures have zigzagged their way — first up, peaking most recently on July 1st at $76.22 before settling down again and closing yesterday at $71.37.
Rystad Energy guru Douise Dickson said, "The excitement in oil prices that led (international) Brent close to reaching $78 per barrel has all but dissipated.
“Now, the OPEC+ discord takes a back seat to market worries over the resurgence of Covid-19 cases globally and the impact on oil demand in the near term."
Of course, rising crude prices are visible to consumers in what we pay for gasoline at the pump.
The Consumer Price Index released on Tuesday showed energy prices rising by 2.5% in June and a painful 45% over the past year. Ouch!
10% Increase in Demand Next Two Years
And despite all the optimistic talk of electricity running most of our vehicles in the coming years, what generates that electrical energy remains an issue — especially if a major desired outcomes is lower emissions.
And based on yesterday’s IEA Electricity Market Report, our nation and most of the rest of the world will need to either curb future demand or see increased energy production, or both.
The International Energy Association estimates that global electricity demand will jump by 5% in 2021 and another 4% in 2022 as economies around the world recover from the pandemic.
The report notes that although electricity generation from renewables “continues to grow strongly” — it’s set to rise by 8% this year and over 6% in 2022 — it can’t keep up with increasing demand.
The IEA said renewables were “expected to be able to serve only around half of the projected growth in global demand in 2021 and 2022.”
At the other end of the spectrum, electricity generation based on fossil fuels was “set to cover 45% of additional demand in 2021 and 40% in 2022.”
Looking at the overall picture, fossil fuels remain dominant when it comes to electricity generation.
Last year, coal generated 34% worldwide, gas accounted for 25%, and renewables and nuclear combined for a 37% share.
Energy companies are still discovering new oil fields in the U.S. and elsewhere, where fossil fuels continue to play a significant role in electricity production.
Whether that’s good for the planet in the long run is a judgment you can make. For now, we know that with a lid on oil production, prices at the pump will only rise with increasing demand.
Protect yourself from rising prices by making sure you have a generous amount of gold and silver in your portfolio!