Energy price volatility: exploring supply and demand

Over recent years, fluctuating supply and demand has had a big impact on global oil and gas prices.¹

One reason prices are so volatile is that short-term demand for energy responds much faster to growth changes than price changes. So, when there’s an energy shock, it can take a considerable price change to clear the market.

Geopolitical events and severe weather disrupt the supply of crude oil and petroleum products to market. This can then affect crude oil and petroleum product prices. These events may create uncertainty about future supply or demand, leading to higher price volatility.

It takes years to develop new supply sources or vary production. It’s tough for consumers to switch to other fuels or increase fuel efficiency in the near term when prices rise. Under these conditions, a significant price change can be necessary to re-balance physical supply and demand following a shock to the system.²

Social and political factors

The pandemic brought about the biggest sustained shift in demand since the second world war. Before Covid-19, global oil demand was around 100 million barrels a day, but three billion people in lockdown sent demand plummeting.

Suppliers could not turn off the spigot fast enough. On 20 April 2020, the oil price fell briefly to less than $37 a barrel as storage facilities became overwhelmed and suppliers wanted to avoid dumping penalties.³

Much of the world's crude oil is located in regions that are historically prone to political upheaval. Many have had their oil production disrupted due to political events. The war in Ukraine has created an unprecedented Europe-wide energy crisis thanks to an 80% reduction in Russian gas supplies. This unfortunately looks set to continue throughout 2023.⁴

Environmental, Social and Governance (ESG)

Investment in new oil and gas production was already weak before the pandemic, partly in response to global initiatives to move away from fossil fuels.

There’s increasing social and environmental pressures on many oil and gas companies. This raises questions about the role of these fuels in a changing energy economy and the position of these companies in the society. Environmental, social, and governance (ESG) investing and regulations are reducing oil and gas industry’s access to financing.

Facing up to the financial impact

As the world cuts back on fossil fuels, the financial impact of switching to green energy will hit countries severely. According to a report from the think-tank Carbon Tracker, some could lose at least 40% of total government revenue.⁵ It estimates that the cumulative total revenue loss for all oil-producing countries by 2040 will be $13 trillion.⁵

For contractors, the consequences are hard to predict. Should revenues falter, operators will seek to pass some of that impact down the chain. Margins, already tight after the last 18 months, will be squeezed even more.

Managing risks

These are uncertain times in the oil, gas, and energy sector and operating in this sector is already high risk. Working with AIG, we’ve created an exclusive energy contractors insurance solution to strengthen your position. This solution is not available anywhere else on the open market.

Find out how we can help you identify your key risks and defend against them. Our experienced sector experts are fully equipped with industry insight and insurer connections to find you the cover you need to protect your business.

Download our whitepaper 'Staying future confident in a volatile climate'.

How oil, gas and energy contractors can manage risk against an uncertain backdrop.