Sunday, June 23, 2024

PAR: Oil prices spike following pandemic and market instability

by BIZ Magazine

Oil prices per barrel have spiked higher than in the years prior to the COVID-19 pandemic.

West Texas Intermediate (WTI) was $118.57 per barrel on June 6. According to Macrotrends, the previous high was in summer of 2014.

WTI refers to a specific grade of crude oil mainly produced in Texas and one of the main three benchmarks in oil pricing. This grade acts as a reference for buyers and sellers of crude oil. WTI is commonly understood as the “price of oil” in the United States.

The WTI price dropped $47.44 per barrel in two months at the beginning of the pandemic’s lockdown because of low demand. Oil producers, who were making reduced profits, subsequently closed their pumps, which set the stage for lower production capability.

Following economic recovery after the recession, many oil producers are struggling to meet the demand that is outpacing their gradually recovering production capability for a variety of reasons. The price per barrel has since skyrocketed and reached similar prices to the Great Recession of 2008.

Economic sanctions on Russian crude oil imports in response to the invasion of Ukraine are further compounding the recent volatility.

Louisiana collected roughly $324 million less in severance taxes and oil royalties in the 2020-21 budget year compared to 2018-19 because of the pandemic.

severance tax is imposed on the extraction of non-renewable natural resources, such as oil and natural gas. Severance tax rates vary from state to state. Louisiana’s oil severance tax rate is 12.5% of value per barrel of 42 gallons, according to the Department of Revenue.

An oil royalty is a payment received for the percentage ownership of the sale of oil produced on state lands. The royalty amount is agreed upon between the mineral rights landowner and the oil producer in a mineral rights lease.

Oil and gas severance taxes and royalties are projected to account for about 4% of Louisiana’s total tax collections in the 2021-22 budget year, an amount much smaller than in previous decades.

The projected tax revenue is similar to pre-pandemic levels, but there is uncertainty about future projections due to the current instability of the global oil market.

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