As the economy began to recover in 2020, oil prices rose and generally so did oil production. Oil prices rose due to increased global energy demand and low inventory levels that resulted from production cuts in 2020. However, the December 2020 oil production was still nearly 14% below the level of production in December 2019. Oil prices rose gradually in 2021 before peaking at $83 per barrel in October and declining to $75 per barrel by December. Oil production rose approximately 5%, ending the year at 11.7 million barrels per day in December compared to 11.2 million barrels per day in December 2020. In 2022 oil prices skyrocketed as Putin invaded Ukraine, rising from $75 at yearend 2021 and peaking at nearly $120 in June before dropping to around $80 in December. The price decline was due to increasing economic uncertainty as global interest rates rose to combat inflation. It’s a balancing act for oil companies, as oil prices are affected by supply, demand and other global factors. The major focus of oil companies is to maximize profits and returns for shareholders. Increasing output may increase revenues and profits; however, increasing the supply of oil can also lower global oil prices and consequently lower profits. The volatility of the oil market, an expected economic slowdown, and plummeting oil prices in 2020 created a cautious environment for increasing production in 2022. However, in 2022 the focus on maximizing profits led to record company and industry profits, which included ExxonMobil and Shell reporting their highest quarterly earnings ever. In 2023, economic concerns subsided as U.S. economic growth continued surprisingly strong, which contributed to oil production in the United States rising to its highest level ever. Oil production exceeding 13 million barrels per day began in August and continued through December. Although U.S. oil production has been strong, U.S. gas prices are primarily driven by the global price of oil. The chart below shows the relationship between the global price of oil (blue line, left axis) and U.S. gas prices (red line, right axis). Note the strong relationship in pricing. When the global price of oil increases, U.S. gas prices generally increase. When the global price of oil decreases, U.S. gas prices decrease. The global price of oil is influenced by many factors, including U.S. and global production levels, supply chain disruptions (including wars), global economic growth, and economic and political uncertainties (such as Middle East military conflicts). Whatever affects the global price of oil will likely affect prices paid by Americans at the pump. Since 2021, the global price of oil has generally been greater than the pre-COVID price.
Brent Crude Oil Price (blue line, left axis) and U.S. Regular Gas Price (red line, right axis) (Sources: U.S. Energy Information Administration, IMF)
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Center for Business and Economic Insight
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