Analysis-When it comes to oil, the global economy remains on the hook By Reuters


©Reuters. FILE PHOTO: A worker walks past a pump jack at an oil field owned by the Bashneft company near the village of Nikolo-Berezovka, northwest of Ufa, Bashkortostan, Russia, January 28, 2015. REUTERS/Sergei Karpukhin


By Sarah McFarlane and Mark John

LONDON (Reuters) – The world may be less dependent on oil now than during the energy shocks of the 1970s, but Ukraine’s conflict is clear evidence of a stubborn yearning that can still disrupt economies, confuse politicians and trigger political conflicts.

When the 1973 Yom Kippur War triggered an Arab state oil embargo that convulsed world markets and caused double-digit inflation, oil made up almost half of the global energy mix, a figure that has since dropped to around of a third.

The shift came as rich countries focused more on services, factories became more efficient, and electricity generation shifted from oil to coal and instead.

A Columbia University study last year found that the same economic growth that required a barrel of oil half a century ago can now be achieved with less than half a barrel.

In recent years, some analysts had even speculated that the world economy might take future oil shocks in stride. Others pointed to the COVID-19 lockdowns of the past two years as evidence that the economy could, albeit in a different way, function on drastically less oil consumption.

But the roar of oil demand in 2021 and the spike in oil prices triggered by the Ukraine conflict have again highlighted the size of the effort it will take to wean the global economy from a decades-old oil habit.

Shifting oil demand is difficult in the short term, requiring trillions of dollars to replace legacy infrastructure such as vehicles and equipment, said Alan Gelder, vice president of oil refining, chemicals and markets at consultancy Wood Mackenzie.

“Investment is needed to reduce the link between economic activity and oil demand,” he said.

The latest rally in oil prices – up 50% since the start of the year – has buried hopes fueled last year by the world’s central banks that inflation fueled by pandemic-era stimulus packages would be ” transitory”.

Instead, it has made it all too clear how deeply oil permeates the inner mechanics of the global economy.


Americans drive less and airlines charge higher fares. From the petrochemicals used in plastics or fertilizers for crops to the fuel burned simply to ship goods around the world, derivatives are a big part of the higher prices consumers now pay for all kinds of essential goods.

Chart: Oil and Inflation Expectations:

In the United States, the Fed estimates that every $10 per barrel increase in oil prices reduces GDP growth by 0.1 percentage point and increases inflation by 0.2 percentage point. In the euro zone, as a general rule, every 10% increase in the price of oil in euro terms increases euro zone inflation by between 0.1 and 0.2 points, according to a study by the European Central Bank.

Inevitably, that most visible impact is at the fuel pump.

Europe’s oil-importing nations are rushing to offer motorists discounts on fuel and other concessions, aware of how their anger can turn into broader protests, as happened with the “yellow vests” movement in France in 2018.

Asia, as the region with not only the highest oil demand in the world but also the fastest growing demand, is also severely affected. Japan and South Korea are among those increasing fuel subsidies to offset higher prices.

The world’s largest oil producer, the United States, should be better protected than others. Federal Reserve Chairman Jerome Powell noted on Monday that the country is clearly in a better position to withstand an oil shock now than it was in the 1970s.

But that didn’t stop him from delivering his strongest message yet on his battle against too-high inflation, suggesting the central bank could act “more aggressively” to prevent a price spiral from taking hold.


If it took five decades for oil’s share of the global energy mix to fall from 45% to 31%, it remains an open question how quickly the world, now with its stated goal of net zero carbon economies, can reduce that participation even more.

The shift of motorists to electric vehicles is expected to cause a tipping point in global oil demand, causing it to decline. Passenger vehicles are the sector with the highest demand for oil, consuming around a quarter of the oil used worldwide.

“Oil intensity from now on will fall much faster, as global oil demand will peak in the next few years, then decline, while GDP will continue to grow,” said Sverre Alvik, director of the transition program. energy from energy advisor DNV, which sees electric vehicles reaching 50% of new passenger vehicle sales in 10 years.

However, that is only one side of the story.

Rising demand for oil in Asia, plus the fact that key sectors such as shipping, aviation, freight and petrochemicals lag far behind the automotive sector in switching to alternative fuels, means that large areas of demand for oil remain firmly entrenched.

“Our projections suggest that dependence on oil, particularly imported oil, is unlikely to go away quickly,” IEA analysts concluded in a 2019 note titled “The World Cannot Afford to Relax on the oil safety.

Such prospects suggest that, even in the best of times, the world’s transition from oil and other fossil fuel sources will pose new challenges for both consumers and policymakers.

Isabel Schnabel, a member of the European Central Bank’s Executive Board, this month used the term “fossil inflation” to refer to the price to pay for what she called “the legacy cost of reliance on fossil energy sources.”

For Schnabel, that cost stems in part from how policies like carbon pricing make fossil fuels more expensive, but more so from how energy producers can create artificially tight markets to drive up prices at the expense of consumers. importers.

Add to that the embargoes imposed on Russian oil by the United States and Britain, and Europe’s goal of reducing its imports of Russian gas, and he concluded: “A marked drop in fossil energy prices, as indicated by prices of current futures, seems pretty unlikely from this perspective.

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