quotes Are oil prices to blame for global inflation?

21 May 2023
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Updated 21 May 2023

Are oil prices to blame for global inflation?

The International Energy Agency (IEA) has blamed oil prices for causing global inflation.

A recent statement by the IEA said that the latest OPEC+ voluntary curbs of 1.16 mb/d to support declining prices could risk exacerbating those strains, pushing both crude and product prices higher. This would influence consumers and emerging and developing economies, especially since they are under siege from inflation and will suffer even more from higher prices.

The IEA highlighted in its Global Energy Crisis report that higher energy prices have contributed to painfully high inflation, pushed families into poverty, forced some factories to curtail output or even shut down and slowed economic growth to the point that some countries are heading toward severe recession.

In response to the IEA’s comments criticizing OPEC and OPEC+, the secretary-general of the Organization of the Petroleum Exporting Countries, Haitham Al-Ghais, said that the oil producers’ group and its allies “are not targeting oil prices, but focusing on market fundamentals.”

Al-Ghais added that blaming oil for inflation was “erroneous and technically incorrect and, if anything, will lead to future volatility.”

He said: “It is the IEA’s repeated calls to stop investing in oil, knowing that all data-driven outlooks envisage the need for more of this precious commodity to fuel global economic growth and prosperity in the decades to come, especially in the developing world.”

The rapid shift to renewable and clean energies has contributed to the oil shortage and increasing prices.

Without being biased, I believe that OPEC+’s latest voluntary cut is not a cause of global inflation. This is evidenced by the decline in average Brent crude prices to about $81.1 a barrel during the first quarter of the year compared to about $100.9 a barrel during the same quarter of last year. The price of Brent crude dropped even further to $74.17 a barrel on May 12.

The rapid economic rebound following the COVID-19 pandemic, the tight monetary policies pursued by a number of Western countries, and the raising of interest rates to combat inflation have contributed significantly to global inflation.

The Russia-Ukraine war and subsequent sanctions imposed on Moscow have also contributed to the oil and liquefied natural gas shortage in the market and led to price increases, especially for liquefied natural gas.

Reducing global investment in oil exploration, climate change in various parts of the world and limited investments in new refineries have negatively impacted oil supplies.

The rapid shift to renewable and clean energies has contributed to the oil shortage and increasing prices.

I believe that IEA, OPEC, and OPEC+ should have frequent discussions and debates to reach a mutual agreement on oil market supply, demand and price behavior. This would eliminate and avoid any confusion in the market and hopefully stabilize oil prices.

Such discussions and debates on the oil market mechanism and sentiments will lead to less volatility and encourage investment in the oil industry, knowing that continuous dialog on the oil market will support global economic growth and prosperity in the decades to come in the developed and developing worlds.

Finally, it will enhance the reliability, affordability and sustainability of the energy market.

Talat Zaki Hafiz is an economist and financial analyst. Twitter: @TalatHafiz