What Will Determine Energy Prices in 2024?

Energy is the lifeblood of the global economy. Any rise or fall in prices, particularly of oil and gas, can have major economic and political consequences. A hike in oil and gas prices, for example, leads to inflation which in turn has negative impacts on global trade and growth. The current situation of sluggish growth and high inflation is a case in point, caused first and foremost by the rise in oil and gas prices since the Russian invasion of Ukraine. These negative economic consequences have knock-on political implications, such as protests in various European countries as a result of high levels of inflation.

By contrast, a decline in energy prices has negative repercussions for the state budgets of energy exporting countries, most of whose economies depend heavily on those revenues, but these negative repercussions do not necessarily extend to the global economy.

Yet these considerations illustrate the importance stable energy prices for the global economy and for domestic stability of states around the world. This paper traces out the factors that could affect energy resource prices in the year ahead, based on a key political and economic factors. These scenarios primarily concern oil, whose price is key metric reflecting energy resources as a whole. Along with gas and coal, it constitutes 82% of global energy consumption.

Gaza, Gas and the GOP

The trajectory of several major geopolitical flashpoints indicate that energy prices are most likely to rise in 2024, exacerbated by the likelihood that oil exporters continue to insist on cutting production.

The most obvious factor that could raise the price of a barrel of oil in the first half of 2024 is the potential regional spillover from the Israeli war on Gaza. If Iran and its allies choose to escalate and break the rules of engagement in response to Israeli strikes in Iran and Iraq, along with assassinations and cross-border fire in Lebanon and Syria, Tehran and its allies could respond in several ways.

The first possibility is that Yemen’s Houthi rebels step up their obstruction of commercial maritime traffic, including oil tankers, through the Bab al-Mandab Strait. This would impact the flow of oil, directly hiking energy prices, as well as ramping up the costs of transportation and shipping insurance. Such a scenario could raise crude prices to $90-95 per barrel, which would directly affect both the European Union and the United States, the largest energy consumers in the world.

The second possibility is that pro-Iranian forces carry out focused strikes on oil ships passing through the Gulf, similar to Iran’s operations during recent years, such as drone strikes against ships in Emirati ports. Such a scenario would likely raise the price of a barrel of oil beyond $100 per barrel.

The third possibility is that Iran resorts to drone strikes against oil facilities in eastern Saudi Arabia. Iran has carried out such attacks many times in recent years, but it is unlikely to do so at this stage as both countries have agreed to suspend their differences and seek regional stability, at least for the foreseeable future.

It is important to note that scenarios of energy price hikes due to political or military unrest do not necessarily have a long-term impact, given that as soon as the political or military reason for the rise disappears, prices tend to fall again and stabilize.

Another key factor that may contribute to rising energy prices is economic policy. As central banks seek to curb inflation and start reducing interest rates to boost production, demand for energy resources should increase. This could raise the price of a barrel of crude to around $85-90 per barrel.

Global economic growth and the decisions of energy-producing countries on whether to raise or lower oil output are two factors likely to have a longer-term impact on oil prices, as they are linked to market behaviors and fundamentals.

The weather also has an impact on energy prices, as cold winters and hot summers can significantly increase demand for energy for heating and air conditioning. In 2022-23, many countries in Europe and elsewhere experienced a mild winter, which reduced the demand for gas, meaning that prices did not spike as markedly as may have been expected in light of the Russian war on Ukraine. Particularly hot summer temperatures can also create extra demand for energy to power air conditioning.

Temperature fluctuations can thus significantly raise or lower energy prices, especially spot gas contracts. Weather forecasts suggest that the coming winter in Europe will be relatively cold in contrast to the mild winter of 2023, and this could raise demand and the prices of spot gas contracts.

It should be noted that the results of the U.S. elections will also have repercussions on oil and gas futures markets, as the U.S. is one of the largest producers of oil and shale gas. If the Democratic Party, which opposes hydraulic fracturing (fracking) for shale oil and gas production, this would dampen production and send the prices of energy futures upwards. Conversely, a victory by the pro-fracking Republicans would, naturally, lower those prices.

One scenario that would help stabilize energy prices is that the OPEC+ group of energy-exporting nations continues its current policy of voluntary production cuts, but without adding new cuts. This would likely mean that oil prices stabilize at approximately $80 per barrel. On the other hand, were the group to reduce production even more, prices would naturally rise. The cartel may also call an end to voluntary production cuts once these have achieved a balance between supply and demand in the international market, with the price of crude at between $80-$85 per barrel, a the price that the producing countries consider fair.

Seeking Stability

In summary, there seems to be little prospect for a decline in energy prices in the foreseeable future. None of the factors that would push the price of a barrel of oil below $70 are likely to materialize. The wars in Ukraine and Gaza continue to rage. The OPEC+ countries continue to hold to their policy of voluntary production cuts.

However, there are demand-side factors that could push energy prices lower. The global economy may enter into recession as governments around the world fail to curb inflation. Major countries such as China and the U.S. may tap into their strategic reserves. These scenarios would lead to a small decrease in energy prices in the short term.

Another, major factor that would send fossil fuel prices lower in the long term is the global push for renewable energy. There is a global trend towards sustainability, renewables and reducing global dependence on fossil fuels. However, these forms of energy remain expensive compared to fossil fuels for the time being.

As a result, assuming that the war in the Middle East does not metastasize, the OPEC+ countries continue to maintain a balance between supply and demand, and the global economy gradually returns to stability, the price of a barrel of oil will likely level off at around $75-80 this year, as spot gas contracts also find an equilibrium.

Yet while these favors are the most prominent drivers affecting the rise or fall in the prices of energy resources expected for the current year 2024, there is plenty of scope for the unexpected. Nobody knows how countries may act in the global geopolitical crises to come. The unpredictability of economic policy, both in producer and consumer countries, also adds to the unpredictability in the prices of energy resources.