When you have the oil changed in your car, chances are good that you are paying a lot for it.
Did you ever stop to think about why it is so expensive?
The truth is that there are a few different reasons that motor oil is as expensive as it is.
Here are the top five reasons why the expense of motor oil is so high.
Why Is Motor Oil So Expensive? (Top 5 Reasons)
1. Prices are on the rebound
Due to the pandemic that dominated most of 2020, the need for both gas and motor oil greatly decreased.
Thanks to quarantine people were working from home and refraining from taking vacations, so cars were sitting in driveways, unused.
AAA reports that from mid-February to mid-March 2021, gas was generally 35 cents per gallon more expensive than it was prior to that time period.
Economists have expressed concern that fuel prices may increase more this year than in any other year in the past.
There is already evidence of this happening, as oil has increased in price per barrel by more than $65.
Even as recently as a year ago, this price was thought to be close to impossible.
At that time, oil traders were offering money to buyers just to take their supplies of oil from them.
Experts in the industry have predicted that for 2021 only 11 million barrels of oil will be produced every day.
In comparison, just before the pandemic started in 2020, there were 12.8 million barrels of oil produced every day.
Members of OPEC are now collectively producing 780,000 fewer oil barrels each day.
Yet oil prices have gone up by 30% over the course of the previous few months.
The idea behind this is to support an increase in the price of oil to help fuel the economy.
These increased prices of oil have helped some countries manage their budgets, as well as make a dent in their accumulated dents.
In fact, in February 2021 oil prices were more expensive than they had been for the previous year.
West Texas was pricing their oil barrels at $63.22 and Brent was pricing their barrels at $67.04 Prior to February 2021, oil prices hadn’t been so high since January 2020.
If the demand for motor oil continues at a steady pace, by the end of 2021 it’s been predicted that West Texas will raise its barrel price to $65 and Brent will raise its price per barrel to $70.
Conflict in certain parts of the world is also responsible for the rise in the cost of oil.
For example, in Yemen, Saudi Arabia and Iran have been engaged in a proxy war.
As a result, the price of motor oil has greatly increased.
However, changes may be coming thanks to a possible nuclear agreement between Iran and the U.S. Striking a new agreement could likely lead to an increase in the amount of oil that Iran exports.
In March 2021, Chevron announced that they will be focusing on producing barrels of oil at a lower cost than before. In the event oil prices continue to rise, it will most likely have an effect on how American executives invest their money.
2. Stock In Oil Is Plummeting In Value
Oil companies are experiencing a decrease in the value of their stocks.
This includes major brands like Chevron, ExxonMobil, and Royal Dutch Shell.
In fact, Goldman Sachs recently downgraded Chevron stock from a recommendation to buy to a neutral recommendation, stating that supporting other companies would be a better financial choice for investors than pouring money into Chevron.
Stock analysts are advising investors to instead put their money into other companies such as Exxon, as well as several companies throughout Europe.
One reason for the decrease in stock value is that electric vehicles are becoming increasingly popular among drivers.
It is expected that this will lead to a decrease in the amount of oil that companies transport.
Some experts have predicted that within the next 10 years the oil industry will be facing a fate similar to the coal industry.
Investors are being discouraged from sinking their money into oil stocks because a growing number of car companies are now focusing on producing more electric vehicles than ever before.
Due to the decline in the need for motor oil, since the end of 2020, ExxonMobil continues to sell off their oil fields.
According to the API Crude Oil Stock Change report that as of April 2021, 2.6 million fewer barrels of oil were produced.
The presence of COVID-19 is taking its toll on oil companies.
Another round of the virus running rampant in Europe has caused an increased amount of pressure on the demand for oil.
Stock analysts predict that the next EIA Weekly Petroleum Status Report will state that the inventory of crude oil will have dropped by 1.4 million barrels.
One major oil company, Occidental Petroleum, saw the value of its stock drop by 7.6%, causing concern among the company’s biggest shareholders.
Prices are expected to rise and fall because OPEC is stopping and starting oil production.
Nonetheless, for as long as they are producing oil, numerous countries will be purchasing it from them.
This is something that investors are keeping a close eye on.
3. Decline In COVID Case Numbers
In 2021, the number of cases of COVID is declining.
This means people are starting to venture out of their homes for the first time in a year.
As a result, the demand for motor oil is starting to grow again.
The increase in demand has created the expectation that the price of oil will continue to rise.
Within the next six months industry experts are predicting that a barrel of oil will be worth between $80 and $100.
Rumors are circulating that OPEC could make the decision to increase their production of oil, based on the rise in the price of it.
If OPEC were to further cut their production of oil and the price of it strengthened as a result, it would likely lead to the U.S. producing more oil.
By lifting their output of oil, OPEC may make it riskier for companies to charge higher prices.
If they choose to consistently curb the amount they produce, they may lose a large share of the market.
However, there are a few factors to consider when exploring the rise in the price of oil.
These include the tension that exists in Iran, as well as a possible COVID resurgence.
Even as far back as the summer of 2020, COVID was taking its toll on the oil industry.
The price of Brent’s crude oil saw an increase of $11 a barrel between April and June of that year.
It further increased, this time by $3 a barrel, between October and November 2020.
The expectation for 2021, according to the EIA, was for the price of oil to increase throughout the year.
The predicted average for a barrel of oil from Brent was $49. In comparison, at the end of 2020, it was $43.
4. Oil Supercycle
Though oil prices were low throughout 2020, in 2021 many people are blaming the rise in price on a commodity supercycle.
This is a period where economic activity is exploding following the onset of COVID-19, resulting in a soaring and sudden demand for oil.
In the spring of 2020, both Russia and Saudi Arabia were producing less oil than normal.
It is believed that the reason for this is that they wanted to lower the price of oil in order to eliminate U.S. oil producers from the market.
The consensus is that they achieved what they wanted.
Major oil companies are looking to spend less money on production, a goal shared by OPEC simply because they want to keep the price of oil high.
In order for the world’s economy to recover from COVID, inflation must take place.
The price of oil has a direct link to inflation. For any company that uses vehicles to provide its products or services, motor oil is a necessity.
When the cost of oil rises, companies have to make up the difference.
They do that by increasing how much money they charge their customers.
The stimulus package of early 2021 has contributed to inflation by causing a rise in the rates of long-term interest.
This has an effect on the borrowing power of the U.S government.
They must spend money on infrastructure, which inflation increases the cost of.
As a result, the Fed needs to be able to get low-interest rates.
If they get these low rates by buying Treasury Bonds that are good on a long-term basis, inflation could become an even bigger problem.
The bigger a problem it is, the higher oil prices are likely to go.
Inflation would have to be carefully controlled in order to lower the price of oil.
The other problem is that after an entire year of COVID, many smaller oil companies folded.
Even the large companies that survived lost a significant amount of revenue.
In order to keep going, they would have to make up for the lack of cash flow that COVID caused.
The way to do that would be to raise their prices.
Experts have predicted that once COVID is a thing of the past, oil prices will be considerably higher.
The end of the pandemic is expected to hit at least $100 a barrel.
The last time oil was that expensive was in 2014.
In the past, there were a total of five supercycles somehow related to oil.
The first lasted from the 1970s to the 1990s and was a result of the oil embargo of OPEC.
Those that feel there is currently another supercycle taking place right now have attributed it to not only recovering from the pandemic but also increasingly aggressive environmental policies around the world, and fiscal policies that are very accommodating of the oil industry.
The logic behind this dictates that oil companies will hustle to keep up with the newly increased demand, which will cause oil prices to continue to soar.
5. The Paris Climate Agreement
The Paris Climate Agreement states that nations aim to achieve net-zero emissions.
It encourages companies to use renewable sources for the things they would normally use oil for.
The high price of oil may lead companies to pour more money into both production and exploration.
This is the exact opposite of what needs to be done to comply with the agreement.
Countries whose governments are poor need oil prices to remain high.
The extra money means that governments can do more to please the people, increasing their reputation among the country’s residents.
As a result, these countries don’t want to switch from using oil to using renewable sources.
Underdeveloped countries will likely stay that way if they can’t keep oil prices as high as possible.
In general, advocates for climate control are fighting to keep oil prices high.
The idea is that this will discourage people from using their vehicles as much, leading to a decrease in emissions.
The increase in the use of electric vehicles is just as important.
As long as the price of oil is low, more people will prefer a traditional vehicle to an electric one.
When the price of oil is high, drivers may turn to electric vehicles as a better alternative.
When it comes to countries such as Mexico and Peru, fossil fuel taxes have been reversed due to the high price of oil.
There has been pressure for India to follow in their footsteps because, in all three countries, families have been struggling to survive financially and fossil fuel taxes only made their struggles worse.
Things got so bad in Brazil that in early 2021, the President fired the chief working for the country’s biggest oil-producing company.
This was done to prevent a huge spike in the price of oil. Petrobas, an oil company that operates in Brazil, lost $40 million the previous decade and hadn’t been able to fully recover from the loss.
Even in the U.K., the government gave companies producing oil, a tax break just before the pandemic brought on by COVID began.
In March 2021, the Suez Canal Crisis led to a sudden rise in the cost of oil.
The vessel that had been blocking it was finally free, making it possible to complete the delivery of crude oil.
Under normal circumstances, the Suez Canal allows for the passage of almost two million barrels of oil per day.
Conclusion
The price of oil rises and falls due to many factors.
Some of these factors can be predicted, while others come as a surprise.
But either way, oil is an important part of the world’s economy.
It remains to be seen how much that will change in the near future.
