Back in the 1970s, Arab oil embargoes caused short-term pain for the West due to rising crude prices. However, it also spurred a drive for fuel efficiency that ultimately reduced the country’s reliance on foreign oil. At the same time, it boosted the GDP per unit of energy consumed. Will history repeat itself? There’s no easy way to tell.
Could High Crude Prices Cause a “Changing of the Guard?”
This week, the Economist mentioned that some modern European governments hope current pains at the pump result in a similar shift. More specifically, Western markets could enjoy long-term energy security if they pivot from their reliance on Russian energy toward alternatives. Indeed, high energy prices have already spurred investment in alternative energy sources like renewables and nuclear. In the meantime, high crude prices remain an undeniable part of the current inflationary environment. With costs rising across multiple sectors, politicians are starting to invoke the ire of angry constituents. This is in lieu of the fact that most of the decisions that have left Europe so reliant on Russian oil and natural gas were made a decade ago.
The lack of storage capacity for natural gas is one component. An over-reliance on previously cheap Russian oil and natural gas is another. Compounding the problem is a generation of virtue-signaling politicians who have rushed to shutter nuclear and fossil fuel production.
Now Europe is exposed. And that doesn’t just pertain to crude oil and natural gas. It also applies to refined petroleum products. It’s all come together to form a perfect storm, causing pump prices to rise to historic highs.
The Correlation Between Crude and Gas
Indeed, gasoline continues to surge despite crude prices trading substantially under levels seen in the last decade. As the Financial Times observed, Brent crude reached $123 per barrel last week, which is well below its 2008 peak of $147.50. The record-high diesel and petrol prices have a lot to do with increased refining premiums. These have mostly surged on the back of tight refining capacity during the maintenance season.
That seems to suggest that those premiums will ease once refineries get back to full production, but that is by no means guaranteed. For instance, Chinese consumption has been severely constrained due to widespread lockdowns this year. Still, as those are relaxed, demand will pick up just as the summer uptick in consumption gets underway in the USA and Europe.
Reports that Saudi Arabia and the UAE would increase crude output ahead of the current September review date dampened prices a little last week. That was until news that the July and August increase would likely only be an additional 250,000 barrels a day. That amount of extra supply is useful, of course, but hardly enough to move the market.
Officially, Saudi Arabia’s reluctance to increase output further is due to their wanting to hold back some spare capacity in case prices rise further. Basically, the country claims they need to “keep their powder dry” to counter potential increases in demand, a further reduction in Russian supply, or both.
Habits May Change, But it’s Going to Be Slow
Many experts feel that the price risk is more to the upside. Right now, an increase in demand from China and the imminent start of the driving season is only being countered by the gradual return of additional refining capacity. Eventually, continued high prices will result in demand destruction. But for now, consumers are just paying the elevated prices rather than altering their driving habits.
In the medium-term, eye-watering gas prices will spur more EV sales and possibly the reversal of some storage capacity mistakes made in recent years. Ultimately, a pivot away from fossil fuels will be a decades-long transition. Until then, fossil fuels are still king.
By Stuart Burns via AG Metal Miner
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