The price of oil fell on March 15 after spiking to its highest levels since 2008 as traders in the US and Europe sought to replace crude coming from Russia. The global energy market could be adjusting to the conflict in Ukraine. But if more countries join the US in banning Russian oil, prices will surge again, potentially to their highest point in decades, analysts say.
The good news is that the global economy has never been so insulated from high oil prices. Efficiency improvements and the shift in most countries away from burning oil in electric power plants mean that global GDP can grow without causing matching growth in oil demand. In other words, the global economy is using oil more efficiently than ever, which makes temporary price spikes more tolerable.
“Current oil prices are not an immediate cause for recession,” says Christof Rühl, a senior researcher at Columbia University’s Center on Global Energy Policy. “They’re volatile in the short term, but manageable in the long term.”
In 1978, just before that decade’s second oil crisis, the economy’s “oil intensity” peaked at 0.94 barrels needed to produce each $1,000 of global GDP, according to Rühl’s research. Today the figure is about half that.
That kind of macroeconomic analysis may be cold comfort for frustrated drivers. But gasoline demand tends to hold steady in the face of price spikes unless they remain elevated for more than a few months, Rühl says, because a few weeks of expensive gas won’t induce many people to buy a new car or move to a house closer to their jobs.
High gas prices do siphon off a large amount of consumer spending that might otherwise go elsewhere; just a 10-cent increase costs consumers globally about $11 billion altogether, according to Moody’s (pdf). But for an average individual driver, fuel costs remain a minor share of spending. Gas prices today are equivalent to about 12% of the average US worker’s hourly earnings, according to Moody’s, down from 15% during the last oil price spike in the mid-2010s. Adjusted for inflation, the price of oil at that time was much higher than today, closer to $150 per barrel in today’s dollars; in 2008 it reached close to $200. On March 15 the price was just above $100.
“The gasoline price has a big psychological impact. When you drive by the station, you see it written in giant letters, which you don’t see for most things in the economy,” says Ben Cahill, a senior energy security fellow at the Center for Strategic and International Studies. “But expenditures on energy are far lower now than they have been in the past.”
Still, when the price of oil is high, nearly all consumer products become more expensive, either because they contain petroleum (like plastics) or because they are transported on a ship or truck. So in the long term, at a high enough price, a recession is inevitable. The question is, where is that tipping point?
The full extent of how much Russian oil is really off the market is still unknown, says Bjørnar Tonhaugen, head of oil markets at intelligence firm Rystad Energy. That’s because oil delivery contracts are arranged weeks or months in advance, so the reality of oil trade today still reflects pre-war buying patterns. As those contracts expire, and oil demand follows its usual uptick during the summer holiday season, the price could rise again.
And if most countries decide to shun Russian oil, the price could reach $240 per barrel, according to Rystad.
“That would be a five-alarm fire for the global oil market, and a recipe for recession,” Cahill says. “It would be impossible to adjust to a disruption of that size.”
Short of a global ban on Russian oil, Rystad expects prices will top out between $120 and $160. But high oil prices are self-destructive, and not likely to linger at that level for long. Rühl says that demand would likely see a big dip above $130, especially if it lasts more than a few weeks. Prices at that level would also spur oil companies and their backers on Wall Street to increase investment in drilling; up to now, Cahill says, the industry is still behaving cautiously, and investors haven’t forgotten how badly they got burned by the mid-2010s shale bubble.
Wherever the price goes, the impact on global GDP will lag by several months, Tonhaugen says. and the impact will be greatest in poor countries with agriculture-based economies, where the “oil intensity” is higher. But the longer the Ukraine crisis persists, he says, “recession risk is growing by the minute.”