High price of oil harms growth prospects

The price of Brent crude oil hit $96.78 per barrel on Monday, the highest since 2014. The high oil prices worry governments around the world as they undermine growth prospects and push up inflation.

The immediate cause of the recent rise in oil prices is the geopolitical uncertainties caused by the tensions between Ukraine and Russia. The market is worried that the crisis will lead to the interruption of Russia's energy supply and exacerbate the shortage of oil and gas in the market.

In the early days of the novel coronavirus outbreak, after oil prices fell sharply, much of the industry's capacity was shut down and investment in the industry was sharply reduced, and US shale oil was also withdrawn from the market. This has led to a shortage of oil after the rapid recovery in demand.

In addition, during this period, the global agreement to combat climate change and the long-term arrangement that the use of fossil fuels will be limited and phased out of the market have objectively affected the willingness of some upstream oil and gas industry to invest, thereby exacerbating supply constraints.

Higher energy costs will continue to push up inflation, as higher oil prices will lead to higher costs in a range of areas from food and logistics to heating and industrial production, which could exacerbate the current global inflation problem.

To curb the rapid rise of oil prices, the world should reduce the geopolitical frictions and the motivation for market speculation. If the Organization of the Petroleum Exporting Countries fails to increase production enough to ease the market shortage, the US could accelerate its own oil supply capacity.

Even though the Joe Biden administration is more aggressive on climate issues, inflation pressures will have a big impact on the midterm elections. If the Federal Reserve raises interest rates early or implements tightening policy, it may lead to lower expectations or energy demand, prompting speculators to withdraw funds from the commodity markets.

The impact of rising oil prices on China's manufacturing industry should be closely watched as China is highly dependent on imported oil. The country should reduce the capacity constraints imposed on local refining enterprises and maintain the stability of coal supplies and prices while encouraging investment in low-carbon technologies, energy conservation and emissions reduction.