Tommy Wilkes, Sujata Raho
LONDON, (Reuters) – Despite all the angst over this year’s 65% price jump, worries about a return back to 1970s-style stagflation seem exaggerated. At the least, the developed world is capable of handling even higher-cost crude oil without any stress.
There are many alternatives to oil, such as a rise of less-energy-intensive service sectors and more efficient cars, gadgets, power plants. This has resulted in an evolution in oil demand, not only since the 1970s but also from 2008, when oil futures approached $150.
Here are some graphics that show the importance of oil as well as the effects of the current price rise.
1. HOW INTENSE?
Columbia University’s Center for Global Energy Policy reports that oil intensity, the amount of oil consumed per unit gross domestic product, fell by 56% between 1973-1919.
In 1973, it required just a bit under one barrel to make $1,000 worth of economic output. Today that number is less than half of a barrel.
In 2010, more than 75 litres were used per 1,000 global GDP. Today, it is 65 litres. Morgan Stanley Note from analysts at (NYSE:).
A possible reason is the switch away of oil by intermediate users like power plants.
Although motorists are still dependent on petrol, they now get 25-miles per gallon. This is a significant improvement over the 13 mile average in 1975.
Graphic: Global oil intensity of GDP: https://fingfx.thomsonreuters.com/gfx/mkt/klvykzjkgvg/oil%20intensity.PNG
2OIL IS A CHEAP OPTION
It is true. Oil looks cheap long-term, despite the 43% increase in price since March 2020.
Global equities are up 125% since 2011, major cities saw double- or triple-digit price growth, but Brent futures have fallen 10%.
Between 2010 and 2015, oil averaged over $100 per barrel and global markets and economies held up well, according to JPMorgan (NYSE) strategists Bram Kaplan and Marko Kolanovic.
The authors wrote, “We don’t think that the current energy prices will have a substantial negative effect on the economy.”
Adjusting for inflation, consumer balances, total oil expenses, wage costs, and other asset prices, we believe equity markets can function even with $130 and $150 oil.
BofA analysts state that historically oil prices are problematic when the global cost of energy exceeds 8.8% of GDP. This was last recorded in 2008.
They wrote that energy had a 5.6% share as of October 8. For the threshold to be reached, energy costs must rise by another 60%.
Graphic: Oil prices vs world stocks: https://fingfx.thomsonreuters.com/gfx/mkt/dwvkralzjpm/oil%20vs%20world%20stocks.PNG
3:THERE ARE SOME OTHERS
As more people use and develop renewable energy, oil’s share in the world’s energy mix has declined to 29%. It was around 50% during the 1970s.
According to the International Energy Agency, this will fall to 28% in 2030 and 22% by 2050 respectively if countries meet climate-related commitments. The current 12% share of renewables would increase to 19%, and then 37%.
Graphic: Renewables set to steal oil’s crown : https://graphics.reuters.com/GLOBAL-ECONOMY/GLOBAL-ECONOMY/byprjrbkwpe/chart.png:
McKinsey Consulting suggests that energy demand could also be declining in relation to economic growth. This is based on McKinsey’s analysis of the expansion of renewables, electrification, and growth services in China. China was once heavily dependent upon industry.
Another danger is the escalating prices for other energy sources, such as oil and gas. Record-breaking levels have been reached by coal and gas prices.
Thomas Costerg (senior economist, Pictet Wealth Management) stated that “there is no place to hide.” Oil at $80 makes it more difficult than usual, because both gas and coal have reached record levels.
He added that the costlier power might have a greater impact on consumers if they are forced to reduce Christmas spending.
BofA analysts believe that the global “consumption taxes” from this year’s energy price shock may be as high as 1.6%.
But what happens if there are no predictions for ‘peak petroleum demand’?
Analysts at Morgan Stanley, who predicted Brent hitting $95 this week, believe that investment in new production will fall, and that ‘peak oil supply may arrive sooner than peak demand.
Graphic: Evolution of energy prices: https://fingfx.thomsonreuters.com/gfx/mkt/znvnezkxbpl/EvolutionofEnergyprices.PNG
Even more concerning is the future outlook of emerging markets.
Two shocks are awaiting big oil importers, including India, Thailand, India, and Turkey. Their currencies have fallen against the dollar which exacerbates their problems.
Turkish buyers pay 785 lire for a barrel Brent. For example, the Brent barrel costs 785 lira in Turkey today, as opposed to 370 lira at the beginning of 2021. The prices of Thai baht and Indian rupees have more than doubled.
Graphic: Brent crude in US dollar and EM currencies: https://fingfx.thomsonreuters.com/gfx/mkt/lgvdwlqmmpo/Brent%20crude%20in%20US%20dollar%20and%20EM%20currencies.PNG