The impact of rising oil costs on the local economy

The decision to cut oil production by OPEC+ is already being seen in the local community.

ALBANY, N.Y. (NEWS10) -- In October, The Organization of the Petroleum Exporting Countries announced a decision to cut oil production by 2 million barrels per day. Saudi Energy Minister Abdulaziz bin Salman claims the decision stemmed from “uncertainty that surrounds the global economic and oil market outlooks” as concerns of upcoming global recession loom for western economies.

Following the decision by OPEC+, Brent crude oil prices have been on the rise. As of Monday morning, the price per barrel is fluctuating around $95. Locally, gas prices in Albany and the Capital Region rose by 7.6 cents over the past week, with the average reaching $3.948 per gallon.

In addition to rising gasoline prices, local officials have expressed concerns over heating oil costs for the upcoming winter and how that may impact citizens of the Capital Region. Last week, Congressman Paul D. Tonko announced $412.5 million in funding was awarded from the Low Income Home Energy Assistance Program to help low-income individuals and families pay for home heating costs and cover unpaid utility bills.

Arindam Mandal, Professor of Economics at Siena College, elaborated on the impact of the OPEC+ oil production cut on local gas prices and heating oil costs. When asked whether this was a good decision by OPEC+ when global oil inventories are already very tight, Mandal says they are only protecting their own interest.

"Many of these countries are highly reliant on oil as their main revenue source," said Mandal. "They suffered significantly when the oil prices dropped to $35 a barrel a few years back. For example, the Saudi government had to cut benefits to their citizens on account of declining state revenue from falling oil prices. This created lot of trouble for the Saudi rulers. The same is true for Russia, given that they are fighting a war based on oil revenue.

"So, from the OPEC+ point of view, reducing the global oil supply is a rational decision, but from the rest of the world's perspective, it is a recipe for further hardship and exacerbating the impact of the global recession. This is more of a problem since oil and energy prices are key contributors to rising inflation."

Mandal notes that heating oil prices could continue to rise but is dependent on how the U.S. economy responds to rising interest rates. "Heating oil and crude oil prices are highly correlated. A decrease in oil production means a limited supply of crude oil, and a limited oil supply with rising demand for heating oil during winter months will most likely cause heating oil prices to rise.

"This situation could further exacerbate if the U.S. experiences a colder winter. EIA Winter Fuels Outlook projects a 15% to 40% rise in heating oil expenditure from October 2022 – March 2023 compared to last year. At the same time, there is a rising indication that the U.S. economy already entered a recession or will be entering one very soon due to the rising interest rate policy of the Federal Reserve Board to clamp down on inflation. In this case, the demand for oil will decrease in upcoming months, which may help to stabilize the heating oil price."

According to Mandal, the worst-case scenario during the high inflation era is rising unemployment and a loss in income. "If the U.S. economy enters a recession during the winter months and oil prices remain relatively high due to global supply constraints, no doubt households will be grappling with falling income and relatively high oil prices. The situation is further complicated by the fact that the U.S. government now needs to buy more oil to make up for the Strategic Petroleum Reserve they released to bring down the oil price. At its peak, the U.S. had about 700 million barrels of oil in the SPR. Today, it is around 400 million. Depending on when the U.S. starts purchasing oil to refill the reserves may further put upward pressure on oil prices."