top of page
synergy logo.png

Inflation: OPEC and Oil - İbrahim Halil Aslan

In recent times, some usual topics have become in trend. Almost every day, we complain about why these prices are increasing at such speed or whether this increase is permanent or temporary. A few days ago, on November 10, the Consumer Price Index (CPI) of America for October, was announced. The yearly increase is 6,2%, the highest number for over 30 years. As we go into detail of the data, we immediately observe that the most - weighted item in CPI is “energy." “Energy” that specifically drives inflation accounts for 30 percent of the total increase in inflation alone. This is a big and substantial increase and horrific contribution to CPI.

At a single glance at the weight of the items of CPI, the highest number, 59.1, attracts attention. It belongs to “Fuel Oil” under the “Energy” category. This increase puts pressure on the cost of all types of oil-related - production and increases the cost of living on the land. Therefore, we have heard the United States president Biden complaining about having high fuel oil prices and invited Organization of Petroleum Exporting Countries (OPEC) countries to take any action to increase their oil production and relieve the market. Biden seeks a way to deal with these rising energy costs. He stated that:

Inflation hurts Americans’ pocketbooks, and reversing this trend is a top priority for me. The largest share of the increase in prices in this report is due to rising energy costs.”

Here is a comment of Professor of Economics Jack Rasmus in Saint Mary's College about Biden and the situation:

Already home heating oil price is up 59 percent, and home gas heating is up 28 percent. It is going to get worse as the winter comes. Some economists are projecting heating costs for homes will increase 100 percent by the winter. That's a big problem. I do not see how much he (Biden) can really do about it. He is talking about maybe opening the petroleum reserves, but that's not gonna have much effect.”

Since the main driver of the inflation is specifically fuel oil, what the OPEC says in its monthly reports carries much more importance than before in terms of the production level they will determine and what they forecast about the future. A few days ago, 10 November, OPEC’s monthly report for November was published and it revised some of their predictions regarding forthcoming days and months. OPEC cut its world oil demand forecast for the last quarter of 2021.

The report highlights that especially from the beginning of 2021 until the end of 3 quarter of 2021, the oil demand has always been slightly higher than the total oil production made by non-OPEC liquids and OPEC itself. It may somewhat explain why there exists upward pressure on oil prices up to now. Also, this is not surprising because demand for almost everything has risen due to an economic recovery of around 6 percent worldwide in 2021, which is the highest increase of the last 50 years. Nevertheless, for the fourth quarter of the year, the report is, as a revision, projecting a little bit downward movement in demand so in the prices. This downward revision is mainly driven by the slower demand than anticipated from India and China in the third quarter. Also, because of elevated energy prices, a slowdown in economic growth is more likely in the last quarter of 2021. However, the demand momentum will increase for the first quarter of 2022, and the demand will remain strong for upcoming quarters in 2022. Gathering world oil production and demand under one umbrella gives a more comparable picture of what will happen in the next months. It introduces the gap between demand and production to shrink by 2022 and then to extend from the point where total production passes the total demand. After all these projections and predictions, the final effect on the market will conclude our writing. Both the prices of WTI and Brent will be assumed to decrease through the next year, as the Federal Reserve Bank of Dallas estimates.

Let's turn to Biden. After the whole evaluation I did on this paper, Biden will relax by the sides of OPEC, especially for 2022. As it can be understood, oil production will gradually increase and pass oil demand, indicating downward movement in the prices. (demand < supply) It seems from the limited but significant points I specify that energy will not be as much of a problem in the next year as it was that year in terms of contribution to CPI.

On the other hand, a new concern is uncovered: The rise of inflation could impact Biden's push nearly two trillion dollars social and climate change plan, which is the main focus of the Glasgow Climate Summit took place at a few times ago, said in some environment as the last chance to handle of the climate change. It seems that soaring inflation affects not only energy prices current days but also somehow people's whole life tomorrow, the natural habit of the whole living creatures, sustainability and stability of the world in the future.


bottom of page