The petrol price is rising – so what?

The petrol price has risen, since the beginning of the year by almost 20%, since its low in January 2016 it has almost tripled. While demand remained strong and has continued to grow, supply was reduced during the period of low petrol price. Today inventories are depleted and supply is expected to increase moderately.

On the demand side, it is interesting to note, that even if the worldwide demand continues to grow, demand in the developed countries has declined. In the US for example, total demand at the end of 2017 was lower than in 2000, while the total population in the country increased over the same period by over 40 million people. The increase in demand both per capita and in total hence comes from the emerging markets.

On the supply side, oil producing countries and companies are well aware of this change in trend which will result in a secular slowdown. The producing countries hence have to engage in game theory, taking into account many various and often contradictory economic, political and environmental factors. They have to continuously review their strategy in order to maximise the long term cash flow they can generate from their finite oil reserves.

Many of the oil producing companies on their side are diversifying their business model. Very active in that area is for example the French company Total. For some, the diversification away from their historic field of activity even triggers a change of name. The latest is the Norwegian company Statoil, which going forward will be known as Equinor. This name change aims to reflect the move of the company towards new and more sustainable energy sources such as wind farms and solar energy, in addition to its traditional oil business.

However, even if the end of the age of oil has now been forecasted for the last 40 years, the peak of oil production has still not been reached. The variations in petrol prices and volumes will remain a predominant indicator of the state of the economy in the foreseeable future. Falling petrol prices are generally welcomed by consumers as it increases their purchasing power, however it can raise worries about deflation and reduces the capital expenditure or even the production capacities of oil producers.

Rising prices, unless triggered by political tensions, signal a strong activity of the economy in general, while energy companies are expected to increase their investments. This is the economic environment we currently observe.