By Lina Irawan 
The current price of $90.55 for Brent crude, the international benchmark, places it firmly within a range that has characterized much of the post-pandemic recovery and the period following the full-scale invasion of Ukraine. The year-over-year increase of roughly 32% (from approximately $68.21 one year ago) signifies a robust rebound in demand coupled with persistent supply constraints and geopolitical risk premiums. This sustained elevation in crude prices has broad implications, from influencing global inflation rates to impacting consumer spending power and corporate profitability across various sectors.
Understanding Oil Price Benchmarks
To accurately gauge oil’s performance and understand its global impact, it’s crucial to differentiate between the various benchmarks used in the market. While today’s price references Brent, two primary benchmarks dominate the global oil trade:
- Brent Crude: Sourced from oil fields in the North Sea, Brent is a light, sweet crude oil ideal for producing gasoline and middle distillates. It serves as the leading international benchmark, pricing two-thirds of the world’s traded crude oil. Its wide adoption makes it the most reliable indicator for global oil prices, influencing transactions from Europe to Asia and Africa.
- West Texas Intermediate (WTI): A high-quality, light, sweet crude oil produced in the United States, WTI is primarily traded at Cushing, Oklahoma. It is the main benchmark for U.S. oil prices and is often considered a proxy for North American supply and demand dynamics. Historically, WTI and Brent prices have moved in tandem, though divergences can occur due to regional supply gluts or logistical issues.
Between these two, Brent better represents global oil performance because it prices much of the world’s traded crude. And, it’s often the best way to track historical oil performance. In fact, even the U.S. Energy Information Administration now uses Brent as its primary reference in its Annual Energy Outlook, reflecting its broader global applicability and influence.
Will oil prices go up?
Forecasting oil prices with precise accuracy is notoriously challenging, if not impossible. The market is a complex tapestry woven from innumerable threads, where fundamental economic principles of supply and demand are constantly influenced by a myriad of external factors. When fears of an economic recession loom, geopolitical tensions escalate, or large-scale disruptions emerge, oil’s trajectory can shift rapidly and unpredictably.
Key Drivers of Oil Price Fluctuations:
- Supply Dynamics:
- OPEC+ Decisions: The Organization of the Petroleum Exporting Countries and its allies (OPEC+), a powerful cartel comprising major oil-producing nations, plays a pivotal role in managing global supply. Their decisions on production quotas can significantly impact prices. For instance, recent voluntary production cuts by Saudi Arabia and Russia, along with broader OPEC+ agreements, have been instrumental in propping up prices.
- Non-OPEC Production: Production from non-OPEC countries, particularly the United States with its prolific shale oil industry, also heavily influences supply. A surge in U.S. shale output can temper price increases, while a slowdown can exacerbate supply concerns.
- Geopolitical Risks: Conflicts in major oil-producing regions (e.g., the Middle East, Eastern Europe), sanctions on oil exporters (e.g., Iran, Venezuela, Russia), and disruptions to critical shipping lanes (e.g., Red Sea, Strait of Hormuz) introduce significant risk premiums into oil prices. Traders price in the potential for supply outages, driving prices higher even before actual disruptions occur.
- Inventories: Levels of crude oil and refined product inventories in major consuming nations (like the U.S. and China) provide a snapshot of the current supply-demand balance. Falling inventories often signal tighter markets and upward price pressure.
- Demand Dynamics:
- Global Economic Growth: Oil demand is highly correlated with global economic activity. Robust economic growth, especially from major consumers like China and India, typically translates into higher demand for crude oil for transportation, industrial processes, and power generation. Conversely, economic slowdowns or recessions lead to reduced demand and downward price pressure.
- Energy Transition and Policies: The accelerating global push towards renewable energy sources and stricter climate policies could influence long-term oil demand. While this transition is gradual, it introduces uncertainty regarding future consumption patterns.
- Seasonal Factors: Demand for certain refined products, like gasoline during summer driving seasons and heating oil during winter, introduces seasonal variations in crude oil demand.
How oil prices translate to gas pump prices
Gas prices at the pump don’t only track crude oil. They also include what it takes to refine and move that fuel, the taxes layered on top, and the extra markup your local station adds to stay in business. While crude oil generally makes up a majority of the per-gallon cost, changes in its price have an outsized impact. These components typically break down as follows:
- Cost of Crude Oil (approx. 50-60%): This is the single largest factor. As crude oil prices fluctuate, so too does the base cost of gasoline.
- Refining Costs (approx. 15-20%): This covers the expenses involved in converting crude oil into gasoline and other refined products. These costs include operational expenses, labor, and the profits for refiners. Refinery outages due to maintenance or weather can also temporarily push these costs up.
- Distribution and Marketing Costs (approx. 10-15%): This includes the cost of transporting gasoline from refineries to terminals and then to individual gas stations, as well as the marketing expenses and the profit margins for distributors and retailers.
- Taxes (approx. 15-20%): Federal, state, and local taxes are layered onto the price of gasoline. The federal excise tax alone is 18.4 cents per gallon, with state taxes varying significantly across the U.S., ranging from under 15 cents to over 70 cents per gallon.
When oil surges, gas prices typically rise in tandem. But when oil retreats, gas prices often lag on the way down, a trend sometimes described as “rockets and feathers.” This widely observed phenomenon means that while crude oil price increases are passed on to consumers relatively quickly, decreases tend to be slower. Economists attribute this to various factors, including the time it takes for cheaper inventory to reach stations, retailers’ desire to maximize profits, and the perceived lack of transparency for consumers, allowing stations to hold prices higher for longer. This asymmetry often frustrates consumers and is a frequent subject of public and regulatory scrutiny.
The role of the U.S. Strategic Petroleum Reserve
In case of emergency, the U.S. has a store of crude oil known as the Strategic Petroleum Reserve (SPR). The SPR is the world’s largest emergency supply of crude oil, established in the wake of the 1973-74 Arab Oil Embargo to provide energy security. Its primary purpose is to mitigate severe supply disruptions caused by natural disasters, acts of terrorism, or international conflicts, thereby cushioning the American economy from crippling price hikes.
The SPR, stored in massive underground salt caverns along the Texas and Louisiana Gulf Coasts, has a maximum authorized capacity of 714 million barrels. While its main function is energy security in case of disaster (think sanctions, severe storm damage, even war), it can also go a long way toward softening crippling price hikes during supply shocks. It’s not a long-term answer and is more meant to provide temporary relief, assisting consumers and keeping critical parts of the economy running, like key industries, emergency services, public transportation, etc.
Historically, the SPR has been tapped during events like the Persian Gulf War (1991), Hurricane Katrina (2005), and the Libyan civil war (2011). More recently, the Biden administration authorized significant releases from the SPR in 2022 to combat surging gasoline prices following Russia’s invasion of Ukraine, drawing the reserve to its lowest levels in nearly 40 years (around 347 million barrels). This move sparked debate about the appropriate use of the SPR, with some arguing it should be reserved strictly for emergencies and not used to manage economic inflation, while others defended its use to stabilize markets during an extraordinary period. Efforts are currently underway to refill the SPR, though progress has been slow due to ongoing market conditions and budget considerations.
How oil and natural gas prices are linked
Both oil and natural gas are key sources of the energy we use every day. Because of this, a big change in oil prices can affect natural gas, and vice-versa. While they serve different primary uses (oil for transportation, natural gas for electricity generation and heating), significant changes in one market can ripple through the other.
One key connection is through fuel switching. For example, if oil prices increase, some industries and power generation facilities may swap natural gas for some segments of their operations where possible, which increases demand for natural gas. Conversely, if natural gas prices spike, demand for oil-based alternatives might increase. This flexibility is often found in industrial boilers, certain manufacturing processes, and dual-fuel power plants. The rise of the global Liquefied Natural Gas
