Will Oil Go Back To $100?

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If tensions in the Middle East rise, and the Suez Canal loses most of its traffic because of risk to shipping due to attacks by Houthi rebels, oil prices will rise. The question is, by how much? The very few times crude oil has topped $100, geopolitical problems were the causes. The most recent was Russia’s invasion of Ukraine when oil moved to $105 in February 2022.

Oil prices above $100 would deeply wound the US economy. The level translates into gas prices just shy of $5, that would undermine consumer discretionary income, which is key to America’s GDP levels. For many people with homes heated by oil, it would significantly drain budgets during the cold months. Fuel prices extend to trucking and air travel. America’s large petrochemical industry would be affected as well.  Some companies have benefited from low oil prices.

On an inflation-adjusted basis, oil was near $100 in 1973. Arab nations raised prices because of conflicts with Israel. Columbia University’s Center on Global Energy Policy wrote on October 17, 2023, the 50th anniversary of what is known as the Arab Oil Embargo, “What followed is seared into the American psyche: Fuel shortages across the country left drivers waiting for hours at the gas pump.” The incident helped trigger a recession that ran from 1973 to 1975.

Disruption of production from Nigeria, one of the world’s largest oil exporters, helped push oil prices above $140 in June 2008. The US economy probably would have cratered into The Great Recession anyway because of a severe crisis in the financial markets, but high energy prices worsened the problem.

Today, the question is whether a conflict between Israel and Hamas will cause the spread of military activity to other Arab countries, some of which are oil producers. About 10% of global crude production transits the Red Sea and Suez Canal, according to data from Kler, an analytics firm. These ships can reroute south of the Cape of Good Hope, adding a week or more to delivery times, but that does not solve the demand problem entirely.

One thing that characterized the major spikes in crude oil is that they happened very fast, as did the problems that caused them.

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