Oil’s 1970s parallels overlook key difference

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LONDON, Feb 23 (Reuters Breakingviews) - Oil prices are partying like it’s 1973. Brent crude futures have risen towards $100 a barrel after Russian President Vladimir Putin deployed troops in two separatist regions in eastern Ukraine. The question is whether the battered post-pandemic world economy faces the sort of oil shock that saw energy prices quadruple during the Yom Kippur war between a coalition of Arab states and Israel.

Anyone of a nervous disposition will find plenty of parallels. In 1973, U.S. inflation surpassed 8%, and there was minimal global spare oil capacity. This year, inflation just hit 7.5% in the United States, global oil inventories are low, and the Organization of the Petroleum Exporting Countries counts Russia as a partner under the auspices of “OPEC+”.

Crude prices could well rise further. In most developed countries the amount spent on oil relative to GDP is between 2% and 3%, less than in 2011-2014 and around half the level of the 1970s, Morgan Stanley analysts reckon. That probably means consumers won’t start using less oil until the commodity’s price rises appreciably above $100 a barrel. True, renewables will by 2050 account for two-thirds of global energy supply, on International Energy Agency estimates. But right now they make up 12%.

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Yet a massive spike, of the sort seen between October 1973 and March 1974 when OPEC enacted its “oil weapon” embargo and prices rose from $3 a barrel to above $10, isn’t assured. That’s because the oil producers’ club is more likely to ease than stoke the crisis.

The oil market is artificially tight. OPEC+ is pumping around 3 million barrels a day less than it could, and most of that spare capacity is held by Saudi Arabia and the United Arab Emirates. Both would probably respond to any plea by U.S. President Joe Biden to increase supply to ward off destabilising price spikes. While OPEC+ has maintained its pandemic-era cuts surprisingly well, Saudi Arabia and Russia’s alliance is fragile. It’s less than two years since Riyadh launched a price war, before Covid-19’s demand shock prompted OPEC+ to patch up differences. Renewed supply from U.S. shale producers and efforts to revive Iran’s nuclear deal, which could allow the Islamic Republic to raise oil exports, could also ease pressures.

A major escalation in Russia-Ukraine tensions could still prompt major price spikes. But policymakers fretting about high inflation have some basis for hoping the parallels with 1973 only go so far.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)


- Brent crude on Feb. 22 rose above $99 a barrel to its highest since September 2014. It was trading at $96 a barrel at 1025 GMT on Feb. 23.

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Editing by Swaha Pattanaik and Karen Kwok. Graphic by Vincent Flasseur.

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