How high will it climb? Surging oil prices are stinging many. Now President Biden’s and British Prime Minister Boris Johnson’s bans on Russian oil spur fears of far higher oil ahead, triggering a bear market, recession and more. Nosebleed level crude prices are painful for consumers, pretty much all of them. But economically, oil has a more nuanced tale to tell. For one, the Biden-Boris bans won’t change much. They’re mostly symbolism. Importantly, high oil prices mostly shift output and consumption around. They don’t squash it outright.
Russia is a huge oil producer, exporting nearly 5 million barrels per day, or about 10% of total global oil consumption. But for America and Britain, it is insignificant. In 2021, the US imported 672,000 barrels of Russian oil products daily, about 8% of US oil imports. Overall imports are down drastically in recent years—the US is a net oil exporter. Consider this differently: In 2021, Russian oil constituted just 3.4% of America’s 19.78 million barrels of oil consumed daily. Similarly, Russia accounted for 8% of Britain’s imported oil and 4% of natural gas. These just aren’t huge.
America will easily replace this—and is already on track to do so. According to the US Energy Information Administration (EIA) estimates, the 4-week average of US oil production bottomed on September 4, 2020. It is up 1.3 million barrels per day since. On March 3, EIA projected US oil output will average 12.0 million b/d this year—up from December’s 11.6 million—and 13.0 million in 2023, nearing record levels. Private-sector forecasters expect bigger increases. Furthermore, oil and gas drilling activity, per the Fed, has more than doubled August 2020’s low. GDP data show inflation-adjusted investment in mining and oil drilling structures jumped 57.7% from Q3 2020 to Q4 2021. If oil prices stay high, far more will come. Even the optimistic production forecasts could look timid.
Yes, there are risks. The EU could institute a total ban. Russia could turn off the spigots. The EU gets 27% of its crude oil imports and 41% of gas from Russia. That is big—and EU leaders know it. That is why they aren’t pressing for a ban now. Would Russia halt shipments? Maybe, but energy is 62% of Russia’s EU exports. Cutting this off puts Russia’s own energy-dependent budget at extreme risk.
Beyond bans, Europe’s private sector is broadly boycotting Russian oil. That may last, but the staying power of such voluntary moves seems questionable. Try severe dieting. Sort of the same thing. Russia’s Urals oil blend is now trading nearly $25 per barrel below Brent, the global benchmark. That is a rare arbitrage opportunity, which will entice some to break ranks. Shell already did once, buying Russian oil on the secondary market. They stopped after public squawking. Not every firm is so squeamish. Hesitancy will crumble at the hands of black market realities if the arbitrage opportunity remains.
If the eurozone did lose access to Russian supplies—regardless of how—some countries, maybe even the region, could enter recession. But as we saw in the mid-2010s’ debt crisis, a eurozone recession isn’t assured to go global. Why? The eurozone is 15.3% of current global GDP--down from 17% during the debt crisis and 26.5% during the early 1990’s European regional recession. It is smaller than Asia’s roughly 25% share during 1998's regional downturn. None of those dragged the world into contraction. Sometimes, actually most times, the stronger pull the weaker from the edge.
Besides, oil prices’ macroeconomic impact is far less than feared. Consider: From 2011’s start through Q3 2014, US benchmark oil prices flirted with—and often topped—$100 (Brent is $109 as I write on March 10th). Personal consumption expenditures during those years still averaged 0.44% q/q gains. Oil then plunged, bottoming in early 2016 and remaining under $55 through that yearend. Did cheap oil turbocharge spending? Nope. PCE growth averaged an insignificantly higher 0.67% q/q over that stretch—a meaningless wiggle. This all makes sense. Spending on oil and gas may not be terribly thrilling. But it’s still spending, like buying anything else. Simply said, price shifts shuffle dollars from one bucket to another.
Higher oil prices can also promote investment—bullish. During that Q1 2011 – Q3 2014 stretch, real investment in mines and wells rose 47%, far outpacing non-energy business investment’s 30% rise. And $100 then was worth more than $100 now. When oil prices finally fell, energy investment plummeted. Even renewables benefit as oil climbs, making their higher-cost generation relatively more attractive.
Nosebleed oil prices aren’t great for some non-energy businesses—but they won’t automatically wreck profits. From 2011 – 2014, as oil prices generally jumped, S&P 500 companies’ operating profits averaged 7.9% annual growth. 9 of 11 sectors’ saw rising profits, including Consumer Discretionary firms, which averaged 11.2%. The S&P 500 gained 69.9% while crude frequently bubbled up over $100.
Rising oil’s relationship with stocks isn’t as clear-cut negative as many presume. For every 1973 – 1974 bear market that oil shortages contributed to, there is a 2011 – 2014. Yes, oil prices were high in 2008, but coincidence isn’t causation. They played no material role in that global financial mess.
I don’t dismiss the pain higher oil prices’ pinch upon many, maybe you. That is real and generates my sympathy. But for the economy at large—what matters most for broad markets—oil’s economic sway is exaggerated. Fear of a false factor is bullish 100% of the time, always. Don’t let rising prices scare you from stocks.
