Since russia invaded Ukraine, commodity prices have been gyrating wildly. No wonder. Last year Russia supplied Europe with 38% of its gas and grew 10% of the world’s wheat. It was also the world’s second-largest exporter of oil. Fear that its supply of 4.5m barrels a day could be disrupted has caused oil prices to soar in recent weeks. America’s decision to ban Russian crude from its shores pushed the price of a barrel of West Texas Intermediate (WTI), the main American benchmark, up to $128 on March 8th, the highest for 14 years.
While markets remain jittery, on March 15th the oil price traded below $100 for the first time in two weeks. The price has eased off its highs following announcements promising further supply. On March 1st rich-world countries agreed to release 62m barrels of the 1.5bn they have sitting in reserves. That was followed by a suggestion from the UAE, which produces 3m barrels a day, that it would raise output and call upon other members of the Organisation of the Petroleum Exporting Countries (OPEC) to do the same. Meanwhile, a spike in covid-19 cases in China has traders thinking that oil demand might tail off substantially if much of the country is locked down. Some Chinese refineries have already scaled-back production.
So far only America and Australia have banned Russian oil, but sanctions have made it harder for other countries to get hold of it, too. The number of tankers heading for Russia has fallen by around one-third in recent weeks, according to Kayrros, an analytics firm. A lack of buyers has caused Urals oil, the Russian benchmark, to sell at a 15% discount to WTI over the past week.
If Europe, which buys about half of Russia’s exported oil, also introduced a ban, crude prices would undoubtedly hit new highs. But so far the oil shock of 2022 pales in comparison with those of yesteryear. Adjusted for American inflation, WTI crude is still far short of its record high: $175 a barrel, reached in June 2008 upon concerns that China’s growing appetite for oil would outstrip supply. (Nine months later, after the onset of the global financial crisis, it was down to just $53.) Adjusted for inflation, the oil price is also lower than it was in the wake of the Arab spring of 2010, after which it remained elevated for four years.
The biggest oil shocks, however—that is, the biggest percentage increases in crude prices—occurred in the 1970s. The real oil price rose from $25 to $53 in 1974 after OPEC countries banned exports to America and other countries that supported Israel during the Yom Kippur war. Supply disruptions in the wake of the Iranian revolution of 1979, caused prices to rise from $60 to $133 a barrel in a year. Both shocks triggered a recession in America and western Europe.
There are reasons to hope that America and other economies are in better shape to weather the recent storm. It now takes only half as much oil to produce a dollar of GDP as it did in the 1970s. Although consumers are feeling the pinch at the petrol pump—average prices in America hit a record $4.32 a gallon on March 14th—the average American car made in 2021 is 93% more fuel-efficient than one built in 1975. ■
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