Russian troops were preparing to invade another former Soviet republic. Crude oil prices have skyrocketed. Western countries begged Saudi Arabia to turn on the taps.
This was in 2008, just before Vladimir Putin sent Russian tanks across the border into Georgia. The price of oil in the US eventually hit an all-time high of nearly $150 a barrel.
Trading near $125 a barrel on Monday, US prices are still below that peak, while international benchmark Brent peaked at $139 before dropping to $128. But the echoes of 2008 – from the war to calls from Western officials in Riyadh – are becoming increasingly difficult to ignore.
China’s relentless hunger for energy fueled this rally 14 years ago. This time around, even developed countries are joining the post-pandemic fossil fuel binge.
Remember when the pandemic accelerated the peak in oil demand? US oil consumption hit a new high in recent weeks. The International Energy Agency believes that global consumption will be the same this year.
Proposals have not kept up with the pace, a legacy of lower global investment in exploration and production in recent years, now exacerbated by the sharp cuts in capital spending made in the US shale sector in the wake of the pandemic-induced oil crisis. Some OPEC producers – historically suppliers of last resort – are struggling to meet their production quotas.
recommended
The market, convinced a few years ago that the US shale revolution led to an era of endless abundance, is now worried about scarcity.
The possibility that Russian oil supplies, which meet about 5% of global demand for crude oil and 10% of the export market for petroleum products, could be subject to sanctions exacerbates these fears.
Even without an embargo, new financial sanctions and the flight of Western companies and technology could irreparably damage Russia’s oil production capacity.
That leaves oil prices, already up 25% in two weeks, poised to bounce higher, optimistic analysts say.
“Ultimately, what we are seeing is a repricing of oil,” says Christian Malek, managing director of JPMorgan. His bank, which predicted a new supercycle for commodities two years ago, says oil could hit $150 by 2023. But the crisis in Russia could lead to a “significant overshoot,” Malek says.
U.S. oil prices almost tripled in three months during the 1973 Arab oil embargo and doubled again in two months after the 1979 Iranian revolution, when the country’s crude oil production plummeted. Other suppliers intervened, minimizing the global shortage. In 1979, the surge was driven by the fear of shortage, not the shortage itself.
There are still reasons to be bearish now. The speculative fervor has eased somewhat, says Pierre Lacaze, founder of brokerage LCM Commodities.
The so-called “negative gamma” – options traders cover their short positions as prices rise rapidly – has been an important factor as oil prices have risen from $70 to $100 a barrel. But there are “not-so-significant” fairly short positions that would indicate upside potential solely on a “negative gamma” basis, Lacaze says. Instead, the market reacts to geopolitics and fundamental factors.
And these forces can still turn against oil prices. The consequences of the war in Ukraine could weaken the global economy. A diplomatic deal with Iran would bring more of its oil to the market.
Citi analysts, among Wall Street’s few remaining oil bears, say rising global production, including in Iran, will push prices lower this year “as the focus shifts from geopolitical risks to sustained oversupply and peak oil demand” .
The US and other countries have also shown that they will release strategic oil reserves to try to tame prices, notes Amy Myers Jaffe, a professor at Tufts’ Fletcher School.
However, the sustained loss of Russian oil supplies will be difficult to reverse. Even the rich US shale play will take years to fulfill its role.
A crash could push oil prices above $200 a barrel, said Rob West, head of research firm Thunder Said Energy.
Eventually, the price shock will be another compelling reason to stop burning fossil fuels that cause climate change. The transition to electric vehicles, already underway at a rapid pace, will accelerate. High prices will cure high prices.
But no one knows what this demand destruction threshold is. Unlike the price spike in July 2008, when the mother of all credit crises was brewing in the background, today’s economic background is also optimistic. Many consumers are full of cash post-pandemic and itching to burn off energy.
“We continue to underestimate the price of oil that the world can handle,” Malek says. If this is your first oil shock and you’re already wincing at the gas pump, brace yourself. The market thinks you can probably handle more price pain.