The world is still ‘addicted’ to oil

The world may be less dependent on crude oil today than it was during the energy shock of the 1970s. However, the Ukraine crisis is the clearest example of how a thirst for oil can still disrupt the economy. economy, confuse policymakers, and fuel political conflict.

When the 1973 Yom Kippur war broke out, triggering an Arab oil embargo, causing turmoil in global markets, driving double-digit inflation, crude oil went on to account for nearly 50% of the global energy structure. Currently, this ratio has dropped to a third.

This is because rich countries are more focused on services, factories are increasing consumption efficiency and power generation technology is gradually shifting from oil to coal and natural gas. A Columbia University study last year showed that if half a century ago, the world needed a barrel of oil to achieve x% economic growth, it now takes less than half a barrel.

Some economists in recent years have even suggested that the global economy can calm down with oil price shocks. Others point to the two-year Covid-19 lockdown as proof that the world can still function with low oil consumption.

However, the surge in demand for oil in 2021 and the continued escalation of oil prices after the Ukraine conflict show once again that the world is still making great efforts to break a decades-old habit.

Alan Gelder, vice president of refining, chemicals and oil markets at consulting firm Wood Mackenzie, said changing demand for oil was difficult in the short term. Because of this, it takes trillions of dollars to replace infrastructure, such as vehicles or equipment. “Investment is needed to reduce the linkage between economic activity and oil demand,” he said.

The 50% rise in oil prices since the start of the year has crushed last year’s hopes from the central bank that the high inflation rate caused by stimulus policies during the pandemic will subside. But instead, it just highlights the fact, how deep oil is ingrained in the mechanics of the global economy.

Americans drive less. Airlines are also pushing ticket prices higher. From plastics to fertilizers to gasoline, crude oil products play an important role in soaring commodity prices.

In the US, the Federal Reserve (Fed) estimates that for every $10 increase in the price of oil, GDP growth will decrease by 0.1% and inflation will increase by 0.2%. In the euro zone, the European Central Bank (ECB) found that for every 10% increase (in euros), inflation in this area would increase by 0.1% – 0.2%.

The most obvious effect is seen at gas stations. Oil-importing countries in Europe have rushed to propose supporting public gas money, fearing a repeat of the “yellow vest” protest movement of 2018 when the government wanted to raise fuel taxes.

And in Asia – a region that not only consumes the largest oil but also has the highest demand growth, Korea and Japan have increased subsidies to keep fuel prices low.

In the US – the world’s largest oil producer, the Fed said the country’s position is much better than it was in the 70s. However, this has not stopped Fed Chair Jerome Powell from worrying about where inflation is at very high levels. He claims they can “take decisive action” to avoid an uncontrollable price spiral.

It will take the world 5 decades to reduce the share of oil in the global energy mix from 45% to 31%. So the big question now is how quickly this step can be accelerated, given that so many countries are committed to the Net Zero target.

The shift to electric vehicles is expected to keep oil demand from increasing and gradually decreasing. Passenger vehicles currently consume up to a quarter of global oil.

“World oil demand will peak in the next few years, then decline. GDP will continue to rise,” said Sverre Alvik, program director for energy transition at consulting firm DNV. He predicts electric vehicles will account for 50% of new car sales in the next 10 years.

Of course, that’s only one side of the story.

Oil demand is growing in Asia, coupled with the fact that key sectors such as shipping, aviation and petrochemicals are moving very slowly to energy. This means that demand for oil will remain high for a long time.

“Our estimates suggest that the level of dependence on oil, especially imported oil, is unlikely to disappear quickly,” analysts at the IEA concluded in the 2019 report.

Such a scenario suggests that even in the most optimistic scenarios, a shift away from oil and fossil fuels will present major new challenges for consumers and policy makers.

Isabel Schnabel – an ECB leader – this month used the word “fossil fuel inflation” to talk about the price to be paid for the “consequences of dependence on fossil fuels”. He attributes the high prices in part to restrictive policies that make fossil fuels more expensive. But in large part because energy companies are deliberately putting pressure on the market to push prices up.

Now, with Britain and the United States imposing sanctions on Russian oil, and Europe looking to reduce imports of Russian gas, he concludes: “The possibility of falling fossil fuel prices is unthinkable.”

Ha Kam (according to Reuters)

at Blogtuan.info – Source: vnexpress.net – Read the original article here