Why does the price of oil keep rising?
A mismatch between supply and demand generally explains the rise in the price of oil. For more than 10 years, the investments of the major oil groups in the exploration and exploitation of new fossil deposits have practically stopped simply in order to align their strategies with the provisions desired by the States concerning ecological transition. Clearly, these groups have invested their resources in the development of non-fossil energy instead of devoting them to increasing their production capacities. Current global oil production is nearing its peak.
This situation contributed, along with the post-COVID economic recovery (therefore increased demand for oil), to creating price tension in a market with a stable supply.
To this is added the Russo-Ukrainian conflict and the embargo decided by Europe and the USA. This decision has led to a surge in prices because the supply on the market is not sufficient without Russian oil.
Even political moves to ask the main producing countries to increase their production, as we have seen recently, have not brought a satisfactory response because the current production capacity cannot absorb the amount of missing Russian oil.
Consequently, oil should, unfortunately for Western economies, remain at a high level or even continue to climb, especially if the Russo-Ukrainian conflict and the related sanctions continue beyond next winter.
The euro has weakened against the dollar; what does this mean for Europe?
The euro weakened against the dollar for two main reasons: the Russo-Ukrainian conflict because the eurozone is heavily dependent on Russian gas and the accommodating monetary policy of the ECB which, unlike the FED, does not envisage a sharp rise in interest rates. interest in order to fight against very high inflation. The FED should continue to raise its interest rates to bring them to around 2.75%, while the ECB plans to raise them to 0.75% at best. This yield differential encourages the reorientation of assets in USD and contributes to weakening the Euro.
This fall in the Euro against the USD makes most imported products more expensive. Oil and gas, (energy, therefore), is being treated in USD, and the fall in the euro causes, for the eurozone, a second “punishment” that is added to the rise in prices.
The economy is ultimately only transformed by energy; as energy becomes expensive, end consumers in the eurozone have to put up with rising inflation.
Only manufacturing companies in the eurozone that export massively will be able to benefit from the fall in the euro.
Inflation is very high this year, will this trend continue in the following years? The beginning of a recession?
The problem with current inflation is that it is not due to overheating of consumption, at least in Europe, but that it is caused by what is called supply shocks, an imbalance between supply and demand. In this case, the disorganization of post-Covid production chains, and the increase in energy and raw material prices were linked to the post-Covid recovery and accentuated by the Russo-Ukrainian conflict.
In order to control inflation, central banks primarily leverage interest rates. By moving them, they seek to influence consumption, and therefore growth: the lower the rates, the cheaper the cost of money, and the more activity will be sustained… and vice versa.
However, on these supply shocks that we are currently experiencing, central banks have very little control… if they raise rates too aggressively in order to correct inflation, they can cause a sharp drop in consumption or even create a recession, which is of course not the objective.
In a context of high uncertainty – what about the Russo-Ukrainian conflict and the embargo on Russian oil and gas – knowing how high the ECB will be able to raise its rates in order to fight inflation effectively without causing a recession is difficult.
In my opinion, if the conflict persists, the risk of a recession in Europe is real.
Your projection for the future:
The ax has fallen, in 2035 or even 2036 for some, cars produced in Europe will have to be all-electric. I remain amazed by this decision which I consider dangerous. I am not opposed to electric, I remain opposed to all-electric. The carbon footprint of electric cars if we consider the whole life of this type of vehicle is absolutely not favorable. Let’s be realistic: the cobalt, lithium and manganese used in the composition of the batteries are exploited in Africa, the manufacture of the batteries is carried out in China. Shifting the carbon footprint is certainly not the solution. Until 2035, Europe will have to gradually cope with a sharp increase in electricity consumption so that a few hundred million users can recharge the batteries of their cars. How are we going to generate the necessary electricity? Burn more coal, increase the number of nuclear reactors?
Finally comes the thorny problem of recycling end-of-life batteries and in particular the treatment of polluted minerals… But that’s not all: the automotive industry directly represents several million jobs in Europe which will be deeply affected. An economic aberration.
Hybrid cars, the synthetic fuel now being developed by European manufacturers, or even hydrogen are all solutions that, in my opinion, would have been as or even more efficient than all-electric. Ecology is a noble fight, the good economic health of a country is essential.
Will Western countries remain the leaders in the financial markets?
They are no longer. The financial markets attach more importance to the economy of the two leading world powers, the USA and China. The ‘old’ Europe is sinking into repeated eco-political compromises that pollute economic visibility and increase uncertainty. Financial markets hate uncertainty. When the USA or China sneezes, Europe catches a cold.
China, where do you see this country in 25 years?
China has become one of the most influential political and economic powers. Therefore, the ability of this country to support sustainable development is a key issue.
Several scenarios exist, for my part. I think that the central power will remain strong and will succeed, through its pragmatism combined with greater openness, in keeping a flourishing economy. Faced with this new giant, each country except the United States weighs little, and will weigh even less. China should become the first world power in terms of GDP in the next 10 years.