Fears of another wave of inflation as oil price 'heading for $100 a barrel'

Saudi Arabia is leading the charge in OPEC's attempt to raise oil prices, Joel Hills reports

It costs Saudi Arabia as little as $10 to extract a barrel of crude of oil from the ground.

Only last month, Aramco - the oil giant which is 95% owned by the Saudi government - made a mind-boggling profit of $161.1 billion (£134 billion) for 2022. Shell’s annual profit of $39.9 billion looks almost modest by comparison.

Russia’s invasion of Ukraine has been a financial disaster for governments across Europe which are big importers of oil and gas but for those nations which sit on vast reserves of hydrocarbons it has been a time of plenty.

What worries the big oil producers is the market price of oil has been falling steadily ever since last summer.

This morning, Saudi Arabia led the charge to heave prices north again, as seven oil-producing nations - including Iraq and the UAE - collectively announced plans to cut oil production until the end of the year.

Russia, which is also a member of the extended OPEC cartel, also plans to close the spigots.

As it stands, 83 million barrels of oil are produced every day around the world. Next month that will fall by 1.7 million barrels.

This morning, the market price of Brent Crude jumped to $84 a barrel as the cuts were confirmed.

Jorge Leon of Rystad Energy tells Joel Hills that this move will be felt by all consumers and will likely lead to increased inflation and, in some economies, recession

Mr Leon thinks OPEC has the muscle to deliver $100 a barrel in the months to come.

“This is going to be felt by every consumer in oil consuming nations,” says Mr Leon.

“Not only is petrol, gas and diesel going to be more expensive, but I also think this will fuel inflation in the West and this is most likely to prompt central banks in the West to further increase interest rates.”

It’s a depressing prediction, but not the only view.

Capital Economics thinks $90 a barrel is more realistic and expects the inflationary impact “probably not large enough to have a material impact on our forecast” will be modest.

Stock markets around the world are mixed, as a jump in oil prices threatens to add upward pressure on inflation. Credit: AP

Someone’s wrong. Keep your eye on the pump price of unleaded - 144 pence today. It has fallen 20% since last summer. That trend may be about to reverse. But remember too that there is only a weak link between the market price of oil and gas prices which, mercifully, have fallen back to pre-invasion levels.Of course, higher oil prices are likely to mean higher profits for oil companies. 

BP’s shareprice jumped today, so too did Shell’s The UK, which produces 898,000 barrels of oil a day (1% of global output).

The Office for Budget Responsibility (OBR) expects government cash receipts from the North Sea to total £10.6 billion in 2023/24.

The windfall could be even higher.

The OBR’s estimate was based on an assumption that the market price of oil would average $80 a barrel this year.

OPEC clearly has other ideas.

As for Russia, the Kremlin is managing to produce as much oil today - 10.9 million barrels a day according to Rystad Energy - as it was before it invaded Ukraine despite the imposition of sanctions.

But “Urals” oil trades at $64 a barrel, a steep discount to Brent. China and India seem happy to continue buying from Russia but they are demanding a lower price. 

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