Hard to get worked up over $100/bbl oil
Updated: Jun 4
On Sunday, OPEC made a surprise announcement that it would reduce crude oil production by 1 million barrels (bbl) per day, rising to perhaps 1.6 million bbl/day by late summer. Oil futures have jumped to about $80 recently in anticipation of the effect of the production cuts on the global oil supply-demand balance. Some analysts have predicted $100/bbl oil in coming months as a result of the production cuts.
Certainly the cut in OPEC production is unwelcome at a time of rising stress on the US and global economies. Higher crude oil prices will raise business costs and lead to a temporary upward blip in inflation. If that feeds through into ongoing inflation, it will make the Fed's disinflation job harder, potentially leading to higher interests for longer.
But a little perspective is important. In inflation-adjusted terms, even at $80/bbl crude oil prices are running below the average price that has prevailed over the 2004-2022 period. (Prices averaged about $88.50 over this period, measured in 2022 dollars.) A price of $100 in June would equal about $94/bbl measured in 2022 dollars.* That would be nearly a third higher than the March average price, but only 7% higher than the long-run average. At that level, it is hard to see how this would have a significant adverse impact on business costs and the macroeconomy.
To be sure, no one knows how high oil prices will actually move in response to the OPEC supply cut. A higher peak would have a bigger adverse macroeconomic effect. It would have been nice if they had held off for now, but spending needs of some OPEC governments apparently drove the decision. One clear adverse consequence is that, despite the Western embargo on Russian oil, higher world market prices will help fuel the Russian war machine. Oil prices have implications that extend beyond their purely economic ones.
*I have to assume something about US consumer price inflation in coming months in order to calculate the future real price of oil measured in 2022$, if the nominal market price rises to $100 by June. I assume the CPI slowed from 6% in February to 5.5% in March, but then accelerates back to 6% for the April-June period because of the higher oil prices. Different reasonable assumptions would not materially affect the real price estimate.