The price of oil has skyrocketed in recent weeks in response to concerns that the war in Ukraine will significantly reduce supply. But what happens in the oil markets never stays in the oil markets.
US crude oil price jumped to a maximum of 13 years of US$130 on March 6, 2022. It has gone down but has been trading above $110 since March 17. That is more than 60% higher than it was in mid-December, before fears of a Russian invasion began to grow.
Of course, this has pushed up the cost of gasoline, which reached a average of $4.32 per gallon in the US on March 14. But less is understood about how rising energy prices trickle down into the prices consumers pay for toys, electronics, food and just about every other product you can think of.
Energy is becoming one of the main causes of inflation, by which I mean a sustained and widespread increase in the prices of goods and services in an economy. The latest data shows that prices are rising at a 7.9% annualized ratethe highest in 40 years.
On my economy classesI like to joke with my students that we eat oil. Students have a hard time imagining drinking crude oil or gasoline, but in fact it’s both figuratively and almost literally true, and I’m not even talking about how humans ingest around a oil-based plastic credit card value weekly.
Let me explain.
Planes, packages and polyester
Oil prices affect the prices of other goods and services in several significant ways.
The most obvious is that oil feeds the vast majority of cars, planes, and other vehicles that move things. On 71% of the 6.6 billion barrels of oil the US consumed in 2020 it was used for various types of fuels, such as gas, diesel, and jet fuel.
this pushes up transport costs and makes the shipment everything from refrigerator components to everyday items like toothpaste are more expensive. Companies may choose to absorb the cost, for example, if their market is highly competitive. but they usually pass it on to customers.
But oil is also a key ingredient in much of what people buy, both on the packaging and in the products themselves, especially food. That’s where most of the Another 29% of the oil used by Americans comes in.
Petrochemicals derived from petroleum are used to make clothing, computers, and more. For example, the amount of oil-based polyester in clothing has doubled since 2000. More than half of all The fibers produced throughout the world are now made from oil, which requires more than 1% of all oil consumed.
furthermore, the The cosmetic industry relies heavily on oil. since items like hand cream, shampoo, and most makeup are made from petrochemicals. And as with many products, all those beauty creams and liquids are put into single-use containers. plastic containers made of oil.
Similarly, the vast majority of toys produced today are made of plastic.
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The food industry is particularly sensitive to the price of energy, more than any other industry because Oil is a key component of your supply chain every step of the way, from planting and harvesting to processing and packaging.
Interestingly, the largest use of oil in industrial agriculture is not transportation or fuel machinery, but rather the fertilizer use. Large amounts of oil and natural gas get into fertilizers and pesticides that are used to grow and protect grains, vegetables and fruits.
Oil is also an ingredient in the foods we eat. The main food product that comes from oil is known as mineral oil. It is commonly used to make food last longer because the oil does not go rancid. Packaged baked goods such as cookies and pizza they often contain mineral oil as a way to preserve their shelf life.
paraffin waxa colorless or white wax made from petroleum, is used in the production of some chocolates and sprinkles on fruit to slow deterioration and give them a shiny finish. It also helps chocolates stay solid at room temperature.
And plastic is a vital part of food packaging because it’s relatively cheap, strong and lightweight, provides protection and it is sanitary.
Oil inflation and the Fed
The importance of oil to the US economy has been a major concern since the 1973 oil crisis, when prices soared, prompting calls to conserve energy.
Since then, the amount of oil consumed for each dollar of economic output has decreased by about 40%. In 1973, for example, it took just under a barrel of oil to generate economic output equivalent to $1,000. Today, less than half a barrel is needed. That’s the good news.
The bad thing is that, because the US economy it is now 18 times larger than it was in 1973it requires a lot more oil to run.
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