Falling Oil Prices Defy Predictions. But What About the Next Chapter?

When Russia invaded Ukraine last spring, energy experts were predicting that oil prices could reach $200 a barrel, a price that would send the costs of shipping and transportation into the stratosphere and bring the global economy to its knees.

Now oil prices are lower than they were when the war began, having dropped more than 30 percent in barely two months. On Monday, news of a slowing Chinese economy and a cut in Chinese interest rates sent prices down further, to less than $90 a barrel for the American benchmark.

Gasoline prices have fallen every day over the last nine weeks, to an average of less than $4 nationwide, and prices of jet fuel and diesel are easing as well. That should translate eventually to lower prices for things as diverse as food and airline tickets.

But it would be premature to celebrate. Energy prices can spike as easily as they can plummet, unexpectedly and suddenly.

China, where Covid-19 lockdowns remain widespread, will eventually reopen its cities to more commerce and traffic, increasing demand. Withdrawals of oil from the U.S. Strategic Petroleum Reserve will end in November, and it will need to be refilled. And a single unexpected event — say, a hurricane flooding the Houston Ship Channel and taking several Gulf of Mexico refineries out of commission for weeks or even months — could send fuel prices soaring.

That sort of catastrophe could send tidal waves though the American and even global economy since energy prices are fundamental to the prices of everything that is shipped and produced, whether it be grain or building supplies.

“Oil prices always have the capacity to surprise,” said Daniel Yergin, the energy historian and author of “The New Map: Energy, Climate and the Clash of Nations.”

Prices could ease further if Iran agrees to a new draft nuclear agreement after it backed off from its demand that the Islamic Revolutionary Guards be removed from the U.S. terrorism list, opening a potential spigot of at least one million more barrels a day of Iranian petroleum exports.

In addition, the prospect of a continuing increase in interest rates has many investors and economists predicting a recession — and a reduction in demand — even though unemployment is low and profits remain resilient.

“I think oil prices could go lower,” said Sarah Emerson, president of ESAI Energy, an analytics company. “We have several factors coming together at the same time: We have China reducing its imports of crude oil in the third quarter, we have the end of the summer gasoline season, we have concerns about an economic slowdown, and frankly, plenty of supply.”

But she quickly added, “That is not to say prices won’t go back up,” noting the coming end to the drawdown of the strategic reserve — from which the United States, in coordination with other countries, has been releasing up to a million barrels a day — and the possibility that Europe will substitute oil burning for natural gas in case there is a cold winter.

Fuel prices, which consumers can see go up and down on a daily basis at their corner filling stations, play an outsize role in economic perceptions. “The price of fuel is not that big a deal,” said Mark Finley, a Rice University energy economist, “but if you look at its impact on consumer confidence, it seems to be a proxy for how you feel about the world in general.”

Roughly 3.5 percent of total personal spending by Americans is devoted to gasoline, according to an RBC Capital Markets report in June. Lower-income and rural workers who have older, less fuel-efficient vehicles and drive longer distances to work are particularly hurt by high gasoline prices.

Overall, fuel prices are less important than in the past because people are driving more efficient cars and are lately working more from home. But the more people spend on gasoline or diesel, the less they have to spend on everything else.

When oil prices fall, many costs for industry and agriculture, including chemicals and fertilizer, generally follow. And shipping becomes more economical. But when they rise sharply, as they did in 2008 and in the 1970s, they tend to increase other prices and suppress the overall economy. And political fallout often ensues.

Predicting energy prices has always been a fool’s game because there are so many factors, including the expectations of traders who buy and sell fuel, the political fortunes of unstable producing countries like Venezuela, Nigeria and Libya, and the investment decisions of state and private oil company executives.

Today those complexities are particularly difficult to assess.

“(When) Will Oil Bulls Start Revising Forecasts Down?” was the title of a recent Citigroup commodities report. With a global recession “on the horizon,” it said, “which is more likely, a robust hurricane season, seeing prices skyrocketing? A return of Iranian barrels? Or a recession, with oil in the $60s by year-end/early 2023?” If a barrel of oil should drop to $60 a barrel, average gasoline prices in the United States would probably fall at least another dollar a gallon.

But a few days after Citi’s projections, Goldman Sachs Commodities Research predicted a price bounce as fuel demand rebounds. “We see growing tail risks to commodity prices inherent in the scenario of sustained growth, low unemployment and stabilized household purchasing power,” the report concluded.

The war in Ukraine remains a major variable in the worldwide supply outlook since Russia normally supplies one of every 10 barrels of the global 100-million-barrel-a-day market. Since the invasion of Ukraine, daily Russian exports have declined by about 580,000 barrels. European sanctions on Russian oil are expected to tighten somewhat more by February, reducing daily Russian exports by an additional 600,000 barrels.

And as Russia further tightens its grip on natural gas sales to Europe in tit-for-tat sanctions retaliation, European utilities will be forced to burn more oil to substitute for gas.

The fundamentals of the energy markets are sending mixed signals. In forecasts last week, the Organization of the Petroleum Exporting Countries said it expected petroleum demand to be weaker than originally expected this year and next. Still, the cartel expects global demand for 2023 to expand to nearly 103 million barrels a day.

Supplies are gradually climbing because of expanded production in Guyana, Brazil and the United States. Saudi Arabia and other Persian Gulf countries are following suit, though probably not nearly as much as the Biden administration would like. OPEC and its partners, including Russia, had promised to raise their production by 600,000 barrels a day in July and August, although they have fallen somewhat short of that mark.

The outlook for refining is also improving, which could lower prices for gasoline and other fuels. While refining capacity in Europe and the United States has declined in recent years, it is growing in the Middle East, Latin America, Asia and Africa.

Another factor has been relatively tepid demand in the United States, which accounts for more than one-third of global gasoline demand. The summer driving season normally increases consumption by 400,000 barrels a day from Memorial Day to Labor Day. But so far this summer, gasoline demand has been flat with April averages, according to J.P. Morgan Commodities research.

That trend could change as prices go down. Americans increased their gasoline consumption by 508,000 barrels a day last week from the week before, according to the Energy Department. Still, consumption remained more than 300,000 barrels a day less than a year ago.

And then there is the larger shift away from fossil fuels. A growing number of energy investors are skeptical about the future of oil-based transportation and say prices over the long term will come down.

“Demand for electric vehicles is going up,” said Daniel Sperling, a transportation expert at the University of California, Davis. “That sends a lot of signals.”