High oil prices have two sides of one coin. On the one hand, while oil producers are benefiting from today’s oil prices over $70/b, this seems to be creating an extra pain for oil consumers worldwide. What exactly has been happening to oil-producing economies?
Let’s consider the United States as one of the leading producers and exporters of crude oil to date. One the one hand, higher oil prices are clearly a positive thing for American shale oil companies that have been boosting their production and exports and making more profits for themselves and the American government over the recent months.
On the other hand, expensive oil hinders the economic growth in the United States. Higher oil prices outside of the U.S. makes domestic oil products more expensive as well, especially when it comes to gasoline. Over time, this is will trigger inflation growth. If that’s the case, the Fed will have to start raising interest rates more aggressively, which will start curbing the economic growth.
U.S. T-bond yields have been constantly setting new local highs for a while. In the first place, this testifies to the fact that international investors have been losing their interest in these assets. At the same time, the recent events (took place in February) showed us how an increase in the bond yields may force the stock market to crash. If the stock market starts going down, this will worsen the sentiment of national economic entities.
By the way, the government is aware of the threat. Last week, Donald Trump tweeted that today’s oil prices are too unnaturally high, given record-high oil inventories worldwide. He promised to fight that.
The While House is aware of the fact that the summer is coming, which is the time of increase gasoline consumption. At the same time, experts predict that the Americans will have to pay the highest gas prices since 2014, which will probably cut the domestic consumption of gasoline and will reduce to nothing Trump’s tax reform.
At the same time, it’s necessary to recollect the benefits of expensive oil for the USA. The USA has already outpaced Saudi Arabia to become the world’s second-biggest oil producer after Russia. On top of that, WTI is cheaper than Brent, which gives the United States a competitive edge. Bigger production means bigger export and bigger profits.
