WTI SIGNAL 25-03-22 : When it comes to oil, the global economy is still hooked.

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WTI SIGNAL

WTI SIGNAL 25-03-22 : When it comes to oil, the global economy is still hooked.

The world may be less dependent on oil now than it was during the energy shocks of the 1970s, but the Ukraine conflict is stark evidence of a stubborn craving that can still disrupt economies, confound policymakers and spark political strife.

When the Yom Kippur War of 1973 triggered an Arab State oil embargo that convulsed world markets and sent inflation into double-digits, oil made up nearly half the global energy mix – a figure that has since dropped to around one third.

WTI SIGNAL : The shift came as rich countries focused more on services, factories became more efficient and electricity generation switched away from using oil to coal and natural gas instead.

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

Some analysts had in recent years even speculated that the world economy could take future oil shocks in its stride. Others pointed to the COVID-19 lockdowns of the past two years as evidence that the economy could – in an albeit different form –  function with dramatically lower oil consumption.

But the roaring back of oil demand in 2021 and the spike in oil prices triggered by the Ukraine conflict has highlighted again the size of the effort that will be needed to wean the global economy from an oil habit ingrained over decades.

WTI SIGNAL : Shifting oil demand is difficult in the short term as it requires trillions of dollars to replace legacy infrastructure such as vehicles and equipment, said Alan Gelder, VP refining, chemicals, and oil markets at consultancy Wood Mackenzie.

Investment is needed to reduce the linkage of economic activity and oil demand, he said.

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

Instead it has made it only too clear just how deeply oil permeates the internal mechanics of the global economy.

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