Indicators in Focus: Tracking oil barrels and energy reinvestment

Indicators in Focus examines measures of business and economic activity that will help tell the story of 2022.

If gas prices rise in the new year, that increase would mark a return to the mean, rather than a signal of unprecedented high prices, according to University of Missouri professor Victor McFarland.

In October, West Texas Intermediate crude futures, the benchmark U.S. oil price, eclipsed $80 per barrel for the first time since late 2014. Oil prices rose to that seven-year high from around $40 per barrel one year earlier. Gas prices followed suit.

McFarland, who researches energy history, said 2021 price increases represented a return to the mean after the beginning of the pandemic created historically low oil prices.

“People just stopped traveling during the pandemic. Folks were working from home; they were getting their schooling from home,” McFarland said. “So a lot of flights were canceled. Jet fuel wasn’t being used. That cut oil demand a lot.”

Hear more: Part 1 of a look at key 2022 indicators from the Market Dives podcast

McFarland said gas prices are an important metric to evaluate the health of the economy because they are an important part of the average household budget.

“When gas prices go up a lot, it cuts into people’s budgets — they can’t spend as much on other things,” he said. “And as a result, they cut their spending, and it hurts the overall American economy.”

While the economic ramifications of gas prices are important, McFarland also said gas prices play a big role in the public’s confidence in the economy.

“People notice when gas prices are high, so there will be political repercussions,” he said. “If oil prices go up, and gasoline prices go up, that’s just something that people will notice, and it will feed into their perception that inflation is increasing right now.”

McFarland said he anticipates prices to moderately increase because new oil investment decreased significantly during the pandemic. Reinvestment rates among U.S. shale oil producers hit an all-time low in the third quarter of 2021, according to research firm Rystad Energy. This decrease in oil investment could lead to a decrease in 0il supply, causing an increase in prices in the future.

In order to keep gas prices from rising out of control, McFarland said it will be important for the government and energy industry to transition to renewable energy to decrease the demand for oil.

“We need policies … that make renewable energy affordable,” McFarland said, “so that fossil fuel prices are just less important to the average American.”

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