$3 gasoline could be around the corner
OPEC and Russia's unprecedented production cuts last spring lifted oil prices out of a death spiral. Nearly a year later, the group is under pressure to cool off the red-hot market.
U.S. crude has raced back above $60 a barrel. That's a far
cry from the depths it reached last April when oil crashed below zero (negative
$40.32 a barrel, to be exact) for the first time in history. Prices at the pump
are starting to creep higher, too. The national average hit $2.70 a gallon
Friday, according to AAA. That's well above the April low of $1.76 per gallon.
Investors are betting the pandemic will soon be under
control — and that, in turn, will unleash pent-up demand for road trips,
cruises, flights and other oil-consuming activities.
Against this backdrop, OPEC and its allies, known as OPEC+,
are scheduled to meet Thursday to deliberate whether to add more barrels into
the hungry market. They've certainly got the firepower, and the price
incentive, to do just that.
Last year, OPEC+ slashed output by a record-shattering 9.7
million barrels per day. The emergency steps, along with production cuts by the
U.S. and other producers, drove a strong rebound in prices. That recovery has
accelerated in recent months as millions of people around the world have gotten
vaccinated against Covid.
OPEC+ could soon announce the market is now healthy enough
to step up production this spring.
"Given the allure of higher prices, there should be
more supply coming onto the market," said Ryan Fitzmaurice, energy
strategist at Rabobank.
Indeed, sources within OPEC+ told Reuters last week that an
output increase of half a million barrels per day beginning in April is
possible without building up inventories, although a final decision had not
been made.
"Given where prices are, how will anyone tell Russia
that they need to curtail production?" said Jim Mitchell, head of Americas
oil analysts at Refinitiv.
There are several good reasons for OPEC+ to release more
barrels.
First, higher prices mean countries like Saudi Arabia that
rely on oil to balance their budgets can bring in badly-needed revenue.
Second, if OPEC+ doesn't start producing more, other
countries will. That includes frackers in Texas who were sidelined by the oil
crash.
Bank of America strategists told clients in a recent note
that OPEC+ will "preserve market share" by pumping more soon. During
the second quarter alone, Bank of America expects OPEC+ to add more than 1.3
million barrels per day of supply.
There's another reason OPEC+ will want to act before it's
too late: self-preservation.
If gasoline prices keep rising and hit $3 a gallon — and
beyond — it will only accelerate clean energy investments and persuade more
drivers to dump their gas-guzzling SUVs for electric vehicles.
"If oil shoots up to extreme levels," said
Rabobank's Fitzmaurice, "that only helps the renewables story and eats
away at oil demand."
The switch to electric means more costly recalls
Hyundai is recalling 82,000 electric cars globally to
replace their batteries after 15 reports of fires involving the vehicles.
Despite the relatively small number of cars involved, the recall is one of the
most expensive in history.
The numbers: The recall will cost Hyundai 1 trillion Korean
won, or $900 million. On a per-vehicle basis, the average cost is $11,000 — an
astronomically high number for a recall.
The episode signals how electric car defects could create
hefty costs for automakers — at least in the near future, report my colleagues
Chris Isidore and Peter Valdes-Dapena.
The recall is another indication of just how expensive EV
batteries are relative to the cost of the entire car. Until the cost of
batteries comes down, through greater production worldwide and economies of
scale, the cost of making electric vehicles will remain higher than comparable
gasoline cars.
Once batteries do become less expensive, as is expected in
the coming years, electric cars could become much cheaper to build because they
have fewer moving parts and require as much as 30% fewer hours of labor for
assembly compared to traditional vehicles.
Fewer parts on electric vehicles could also mean that auto
recalls become less common in the future. But for now, there could be
significant costs if battery fire problems require battery replacements.
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