Daily Times

Oil is one of the most important commodities in the world, accounting for approximately 3 per cent of the gross domestic product. Petroleum products are found in everything from personal protective equipment, plastics, chemicals, and fertilisers to aspirin, clothing, transportation fuel, and even solar panels.

Global fuel prices have continued to rise for the past many months and the upward trend only seems to be gaining momentum. Experts believe it is the Russian-Ukraine war coupled with the surging demand from economies as they recover from the pandemic that is causing this rise in the oil prices. But is that truly it or are there any other factors that we may not have considered?

The price of brent crude oil started at around $78 a barrel (as of January 1, 2022) in the international market at the start of FY 2022. This rose to $100 per barrel on February 28, 2022, four days into the Russian invasion of the Ukrainian territory and was recorded at $127 per barrel on March 3, 2022. The global oil prices have stayed above $100 per barrel since then and the world seems to be out of solutions to put the oil genie back into the bottle.

As the masses around the globe continue to feel the impact of high fuel prices, countries are promised increased production to meet the demand but the world’s largest exporter of oil, Saudi Arab points out in a very different direction. Many now are hinting at a very interesting factor contributing to this phenomenon. The lack of refineries that process crude oil into products such as petrol, diesel and jet fuel and the lack of global capacity to meet the rising demand for petroleum products. Saudi Foreign Minister, Faisal Bin Farhan Al Saud pointed out that there is not a lack of oil in the market it is the lack of refining capacity that is a policy decision that the oil-consuming countries need to make.

As Europe prepares for a gas cut, the world is further pushed into the midst of the politics of oil.

On the hand, the International Energy Agency stated that the world can refine about 100 million barrels a day, 20 per cent of which is not usable due to the lack of investment in refineries, particularly in Latin America. Global refinery output has fallen by 3.3 million barrels a day since 2020 due to the pandemic. The United States of America, with the world’s largest refining capacity, also experienced a slowing down in the activity to 17.9 million barrels a day (its lowest since 2014) accounting for 33 per cent of the global loss. While China, Russia and India are also facing low refinery outputs.

The supply of crude where most of the geopolitical and international relations come into play is also one of the reasons that must not be ignored. This critically impacts the strategic oil reserves and countries’ capacity to perform at their fullest. So what actually is happening in countries not only experiencing low refinery capacity but also reducing the export of refined crude oil products leading to a surge in global demand and pushing the prices to the higher end of the spectrum. What is more interesting is that US President Joe Bidden accused refineries of making huge profits in “a time of war.” To see the truth in it, we need to analyse the price differential, also known as the “crack spread” between a barrel of crude in comparison to the petroleum product. Now, this margin is usually over $10 a barrel (as per figures in 2020) which has now jumped up to $55 a barrel indicating a corporate hegemony. According to the Competition and Markets Authority (CMA), growing oil refining margins are one of the main causes of soaring fuel prices, according to the UK’s competition watchdog.

As economists and students of geopolitical affairs, we need to here understand the deep-rooted reality of how these factors and not just the refineries impact oil prices. Based on region, fifty to sixty per cent of what consumers spend at the pump for oil as a source of energy is tax. People are unaware that for every €1.50 spent on a litre of fuel, they pay the government between 70 and 80 cents. Importing nations, such as the EU, get more revenue from oil taxes than exporting nations. As Europe prepares for a gas cut, approved by energy ministers in Brussels, which was hailed as an effective response to Russia’s manipulation of its energy wealth as an economic weapon, the world is further pushed into the midst of the politics of oil.

Globally, the developed countries may be to successfully find better alternates but are particularly troublesome for developing and economically troubled countries like Pakistan which will suffer from the long-term effects. In the second part of this article, I will focus on the economic fragility caused due to the “Politics of Oil” and what options we have in the face of this challenge.

(To Be Continued)

The writer is the Foreign Secretary-General for BRI College, China. He tweets @DrHasnain_javed.