1. Why do we have an energy shock?
Just two years ago, the price of the benchmark U.S. oil futures contract briefly dipped below zero as the pandemic sank the global economy. A year later, the price had rebounded to pre-pandemic levels and continued to rise as revived demand outpaced crude supply growth. Then came a series of wild jerks of sanctions waves by the United States and its allies to exclude Russia, the source of 10% of the world’s oil (as well as other key commodities from wheat to fertilizer to nickel). More than half of Russia’s oil exports go to countries in the European Union, but energy markets are global, so variations in supply and demand are felt around the world entire.
Consumers have been particularly affected, as energy expenditure is difficult to reduce. In the UK, regulators have warned that soaring global natural gas prices are set to drive up the average household energy bill by 42% in October, when a price cap is adjusted upwards, which has the most affected living standards since the 1950s. In much of the world, retail fuel prices have risen even faster than crude. Gasoline topped an average of $5 per gallon (3.79 liters) in the United States for the first time in June, at the start of the summer driving season there. The end result was a spike in inflation the world hadn’t seen in decades, with energy accounting for more than half of the rise in major advanced economies. Beyond price concerns, there were fears that global power grids already strained by climate change could prove even more fragile, leading to outages that could put lives at risk.
There was a scramble to increase supplies and redirect fuels to where they were needed – efforts that met with limited success. The EU gradually introduced a partial ban on Russian oil and bought more liquefied natural gas on world markets to wean itself off Russian pipelines, which accounted for 40% of supply. By mid-June, Russia, for its part, had cut gas flows to four EU countries. The administration of US President Joe Biden has questioned oil refineries about the feasibility of bringing back mothballed capacity. There were other responses as well: to calm the surge in inflation, the US Federal Reserve and its counterparts needed to raise interest rates in the most aggressive cycle of monetary policy tightening in decades (the China and Japan were exceptions). This won’t bring energy costs down right away, but the goal is to slow economic growth to the point where inflation wanes.
In early June, there was no sign of an end to what had become a deadly and bloody war in Ukraine and little hope for a surge in energy production, oil-rich OPEC accepting only a modest increase in oil production. The price of West Texas Intermediate oil futures soared above $120 a barrel, and a potential resurgence in post-pandemic consumption in China, the world’s largest crude importer, threatened to add even more. upward pressure. JPMorgan Chase & Co. CEO Jamie Dimon said oil had the potential to hit $150 or $175 a barrel and the bank was bracing for an economic “hurricane.”
5. How does this compare to previous shocks?
The price spike is comparable to the two most famous oil shocks in history: the Arab-Israeli war of 1973, which led many crude producers to refuse to sell to countries that supported Israel, and the revolution in Iran six years later which for a time cut short about 7% of the world’s crude supply. But there are differences: Economic growth is not as closely tied to oil as it was in the 1970s—production uses far less energy than it did back then. Shale fracking made the United States the world’s largest producer of oil and gas, bringing America closer to the energy independence it sought after the gasoline shortage in the 1970s. Yet the crisis recalled that the world remains dependent on fossil fuels for more than three quarters of its energy, a situation that is expected to last for decades, even if some countries accelerate their investments in renewable energies.
• A Bloomberg Economics report on what is driving inflation around the world
• How Russia’s war in Ukraine is stifling commodity exports.
• A blog post from the International Monetary Fund on how the world is now getting more out of every barrel of oil.
• John Authors of Bloomberg Opinion on comparisons with the oil shocks of the 1970s.
More stories like this are available at bloomberg.com