High oil prices skyrockets inflation

The idea behind the price cap is to keep Russian oil flowing to the global market, just at lower prices. Russia, however, has threatened to simply stop deliveries to a country or companies that observe the cap. That could take more Russian oil off the market and push prices higher.

That could push costs at the pump higher, too.

U.S. gasoline prices that soared to record highs of $5.02 a gallon in mid-June had been falling recently, but they have been on the rise again, posing political problems for President Joe Biden a month before midterm elections.

Biden, facing inflation at near 40-year highs, had touted the falling pump prices. Over the past week, the national average price for a gallon rose 9 cents, to $3.87. That’s 65 cents more than Americans were paying a year ago.

“It’s a disappointment, and we’re looking at what alternatives we may have,” he told reporters about the OPEC+ decision.

Will the OPEC production cut make inflation worse?

Likely yes. Brent crude should reach $100 per barrel by December, says Jorge Leon, senior vice president at Rystad Energy. That is up from an earlier prediction of $89.

Part of the 2 million-barrel-per-day cut is only on paper as some  aren’t able to produce their quota. So the group can deliver only about 1.2 million barrels a day in actual cuts.

That’s still going to have a “significant” effect on prices, Leon said.

“Higher oil prices will inevitably add to the inflation headache that global central banks are fighting, and higher oil prices will factor into the calculus of further increasing interest rates to cool down the economy,” he wrote in a note.

That would exacerbate an energy crisis in Europe largely tied to Russian cutbacks of natural gas supplies used for heating, electricity and in factories and would send gasoline prices up worldwide. As that fuels inflation, people have less money to spend on other things like food and rent.

Other factors also could affect oil prices, including the depth of any possible recession in the U.S. or Europe and the duration of China’s COVID-19 restrictions, which have sapped demand for fuel.