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Oil Topped $80 Dollars Per Barrel — The Most It's Cost In Almost 3 Years

LEILA FADEL, HOST:

Energy prices are going up for things like coal, natural gas and crude oil. Today, oil briefly topped $80 a barrel, which it hasn't hit in nearly three years. And you might feel the effect at your local gas station. NPR's Camila Domonoske joins us to explain what's going on.

Hi, Camila.

CAMILA DOMONOSKE, BYLINE: Hi, Leila.

FADEL: So what's going on?

DOMONOSKE: Well, basically, you have a lower than usual supply of oil. I mean, you might remember, for most of the pandemic, oil producers were actually desperately trying to decrease production.

FADEL: Yeah.

DOMONOSKE: Demand had dropped so much that they had to cut back their output a lot. And they're still coming back from that. You've also got the effect of recent hurricanes, which have knocked some supply offline. So lower supply than usual. And at the same time, demand is coming back up. There are economies around the world that have more activity, more recovery. That means more demand for oil. And there's also something that's really unusual happening, which is that natural gas prices have gone incredibly high. They've absolutely skyrocketed, especially in Asia. And that is actually driving oil prices up.

FADEL: OK, but what does natural gas have to do with the price of crude oil?

DOMONOSKE: Yeah, it's not entirely obvious, so I asked Claudio Galimberti with Rystad Energy to break it down for me. And he said, look, there's a whole bunch of power plants that normally burn natural gas. Specifically, they burn liquefied natural gas, or LNG. But some of those plants can burn oil. And right now, LNG costs so much.

CLAUDIO GALIMBERTI: If you compare the cost of LNG against the cost of oil, it is convenient for a power plant to burn oil.

DOMONOSKE: So they're crunching the numbers, and a bunch of these power plants are switching over. Instead of burning natural gas, they're burning oil. That's created a huge surge in demand for crude oil. And, actually, Galimberti says that he has never seen anything quite like it.

FADEL: OK, so there's all this new demand at the industrial level, which means the price consumers pay at the pump goes up, too?

DOMONOSKE: Yeah, normally. Right? Gasoline is made out of crude oil, so when crude prices go up, gasoline prices normally go up. What's happening now is that gas prices - people probably noticed - were already high. They've been high all summer long. Normally, right about now, they go down. It's fall. Summer driving season is over. Prices drop. What we're seeing now is that those gasoline prices are staying high. They might not be increasing in your area, but they're staying at the same high rates because they're pushed up by the high price of crude oil. And even if you're not just looking at gas prices, there are other ways that high oil prices affect the economy. They raise the prices of all kinds of things because we use oil to move so much stuff around, so high oil prices wind up being an inflationary pressure.

FADEL: So what's going to happen next?

DOMONOSKE: Well, in the short term, there's a couple of big questions. OPEC, the big oil cartel, is having its regular meeting next week with its allies. One big question, obviously, is are they going to increase production, given how much demand there is right now? There are also producers who aren't in OPEC, notably the American oil producers, who have been remarkably disciplined lately, which is not a word that we usually associate with the oil patch. They're pumping less crude oil than they could. Nothing like the days of drill, baby, drill. And the question is are they going to change that as prices keep going up and up?

Long term, there are huge question marks. Here's where there are really divergent views about what the future of oil even looks like. OPEC thinks that oil and gas demand is going to grow for decades. There are other energy groups who look at the future, and they say oil demand's going to drop as the world switches to electric vehicles and green energy. So everybody is trying to figure out what happens next. And I think it's fair to say there's going to be a lot of focus on this big meeting of world governments, the COP26, that's happening in November. They're going to be talking about how to fight climate change, which means they'll be talking about energy and emissions.

FADEL: NPR's Camila Domonoske, thank you.

DOMONOSKE: Thank you. Transcript provided by NPR, Copyright NPR.

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