Why are oil prices so high and will they ever come down?

The price of petrol at your local petrol station is determined by the country’s economic situation, but it is equally affected by extrinsic factors like geo global politics and international supply and demand of oil. In short, it is not necessarily the government which is out there to get you; there are some factors that are not even in its control.

Only a year ago, oil giants like ExxonMobil and others were being written off as have beens. Now, the same are posting record profits. And the reason is simple: rising oil prices.

The oil prices are at their highest in the last seven years with some predicting it to cross $100 per barrel soon. This is largely due to the impending Russia-Ukraine war.

However, oil prices in Pakistan have been on the rise much before the latest crisis between these two nations. So, what’s the “real” reason?

Oil prices not just dropped but plummeted during the initial waves of Covid 19. As the demand died down, so did its supply. However, as the virus mutated into a seasonal flow with the latest variant Omicron infecting many but killing fewer, economies opened up and the demand for oil sky-rocketed faster than anyone had expected. However, oil companies did not or could not meet this rising demand.

The reasons for this lack of response from oil companies are many, the main being fear of another price slump, leaving them with surplus oil. This is also driving their lack of interest in searching for more oil. This shortage in supply has resulted in skyrocketing of oil prices and it is likely to get worse.

Russia invading Ukraine

Russia produces 10 million barrels of oil a day. It is true that Pakistan does not import oil from Russia but any disruption in the global energy supply chain is bound to affect oil prices, which in turn would affect Pakistanis.

The US has already made it clear that in case of any Russian misadventure, the country will be heavily sanctioned. Now that Russia has declared war on Ukraine, it will be sanctioned, limiting its ability to sell oil, which would drive down its oil producing ability. Furthermore, Russia’s inability to export its other resources like natural gas would result in the increase of oil consumption, once again raising demand and prices of oil worldwide.

Pakistan and OPEC

As mentioned earlier, Pakistan does not import oil from Russia. So on the face of it, whatever goes on between Russia and Ukraine shouldn’t affect us. Right? Wrong.

While the western oil companies have been slow to ramp up oil supply, OPEC is no different. It, too, is following the same approach – do not increase the supply just because the price is high as it can come tumbling down anytime – once bitten twice shy.

There is one more reason; some OPEC countries just do not have the capacity to ramp up oil production quickly.

As the demand remains high, unmatched by the supply, Pakistan and other customers of OPEC are forced to buy oil at a high price, in turn, selling it at a high price in their countries.

When will oil prices come down?

To answer everyone’s favorite question, the following will have to happen for oil prices to come down:

Resolution of Russia-Ukraine crisis
Lifting of sanctions on Iran to export oil
OPEC countries ramping up oil supply
Excessively high oil prices driving down its demand, bringing down prices

There is no respite for the local consumer. Oil prices are not likely to come down in the near future. They may not always be increased every fortnight but this would be because of political expediency and not because of the fall in the price of oil in the global markets.