Pricier Oil Could Make Everything Even More Expensive

A man with a dismayed expression stares at a laptop screen.

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The price of everything, especially gas at the pump, is likely to continue climbing as oil prices rise and analysts keep ratcheting their forecasts higher.

The Energy Information Administration warned in its February report on Friday that oil inventories are extremely low as demand increases, and that could push oil prices higher. Inventories held by Organisation for Economic Co-operation and Development countries had fallen to a seven-year low in December and look to have dropped even more in January, it said. Even though U.S. producers have been trying to pump more oil, Organization of the Petroleum Exporting Countries and other producing countries (OPEC+) continue to miss their production quotas, which is exacerbating supply issues.

Because the price of oil makes up about half the price of a gallon of gas, one of the first things to be affected by rising oil prices would be prices at the pump. But it doesn’t stop there. Oil affects the cost of producing things and transporting them to your local store, so even consumers who don’t drive or use public transportation will eventually feel the squeeze of more expensive oil one way or another.

Year-to-date, the price of a barrel of U.S. oil has already soared more than 23%, reaching the highest level since 2014. Demand for oil has increased as COVID-19 restrictions ease around the world, while at the same time supply has been pinched as OPEC+ countries continue to miss their production quotas. Add to that nervousness over whether Russia will invade Ukraine and many analysts have begun talking about $100 or more per barrel of oil. Oil closed up almost 4.5% at $93.90 per barrel on Friday.

“Oil remains the single most important commodity, and its peaks and valleys have played a starring role in almost every major economic cycle of the past 50 years,” wrote Douglas Porter, chief economist at BMO Capital, in a commentary. Every $10 rise in oil prices bumps up headline inflation by roughly 0.4 percentage points and cuts economic growth by roughly 0.1 percentage point, Porter said, because higher energy prices “act like a tax on consumers.” 

In January, consumer prices rose 7.5% year over year, the fastest pace since February 1982, and early government estimates show the economy grew 6.9% in the fourth-quarter of 2021.

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  1. Energy Information Administration. “Oil Market Report—February 2022.”

  2. Federal Reserve Bank of San Francisco. “What Are the Possible Causes and Consequences of Higher Oil Prices on the Overall Economy?

  3. Bureau of Labor Statistics. “​​Consumer Price Index Summary.”

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