Oil Hits $100 Again: Why The Global Economy Isn't Panicking Yet | Expert Explains | Firstpost PoV

[00:00:07][music] It has been the 13th consecutive night of US fresh attacks on Iranian military targets and the most telling signal that this isn't ending anytime soon is Brent crude hitting $100 US for the first time since the month of May. And here to discuss what all that means for the global economy, we have with us you um professor Kristoff Rule. He's an energy economist and a senior research scholar over at Columbia University Center on Global Energy Policy is joining us live from Germany. Good morning or good evening, whatever time it is there, Prof. Thank you for joining the program.

[00:00:50]>> Thank it's a warm morning actually, but thank you for the for the complicated introduction.

[00:00:57]>> [laughter] >> Let's kick off with the fact that this is not the first time we've actually seen um the oil prices spike above 100.

[00:01:05]It's the first time since May, though.

[00:01:07]Um and at the beginning of the war and all with all of these uncertainties, analysts had actually predicted as much as $200 um dollars per barrel, which didn't come into fruition. Tell us what is going on right now. Are you more worried this time around or is this a knee-jerk reaction um to to the overnight attacks that have happened?

[00:01:30]>> I think you're asking exactly the right question and and the answer is the oil market what happened during the first disruption of the straight of Horus came as a sequence of two safety belts so to speak. The first one was when the uh war first started. Uh we had an enormously opportune moment in the oil market in the sense that global oil production was larger than consumption. So the flows there was an excess supply and as everybody know realizes that we had tremendous inventories in particular unknown strategic reserves petroleum reserves in China. Uh we don't know how much but we know it's very large plus a lot of oil on the water. This is oil mostly sanctioned oil on on tankers looking for a home. So that's the first safety valve which we had. It cushioned the first blow uh when this trade sort of became affected.

[00:02:21]>> And that explains why oil prices didn't go as up as much and as fast as analysts suggested. The second uh safety safety belt there is the impact from oil prices on the global economy. That's much less well understood. But we also have an oil market which has greatly changed over the last decades in which oil has become much more a much less important and much less of a burden on the global economy in the sense that we now need a lot less oil to produce the same amount of global products and services of global GDP than before. So that means when we translated it into the current situation that any kind of price increase will have a softer impact than it would have had 10, 20 or 30 years ago. And so we had a coincidence of these two safety belts I call them. Prices didn't go up as much as people feared and the price impact was less than people expected. Now you see the same sort of trend when the situation relaxed again when we had the first sort of round of peace negotiations. Oil prices coming down much stronger, much faster and much lower than analysts had predicted and expected for the same reason that people thought this returns. The market knew it would return to normal pretty fast.

[00:03:36]Analysts didn't probably. And now what we have to coming back to the second part of your question, we have the upward movement again. The difference of course is that now it's not only on off again on off on again. It is also an expansion in the sense that the hooties are threatening pipelines which are safety walls themselves for the maritime traffic industry for moose that could make the situations qualitatively different because if you impact that pipeline kinetically you disrupt it that takes very long to repair and that's different from threatening uh ships. So that is like the equivalent to blow up ships actually uh just that it will last and uh and if that happens then we should expect an even stronger reaction.

[00:04:23]>> So that that brings me to my next question. So this is the first time that there has been this possibility of both the strait of hormuz and of course the the babal mandib strait as possibly unpassable. Right. Um but just to add to what you mentioned earlier on, there was also um an analyst that said that the expectation that the straight of Hormuz would be completely closed um also didn't go come into fruition. There were many times wherein it was reopened again and then of course closed again and then reopened. So that there was traffic it was not completely blocked in this situation. Um, does this 100 per barrel price in a complete blockage of uh of both straits um or the fact that there's just slower traffic? Is it going to be you know uh open, closed, reopened as it was for the straight of Hermoose?

[00:05:17]>> I mean in general the markets aggregate all the information which is available.

[00:05:22]So one is best advised you know just look at the price and think okay that is the broad expectation the sum of all the information we have and whatever any analyst says it's too high or it's too low you know you welcome to bet his own money on it sometimes they're right sometimes they're wrong but it's the opinion of one individual more or less well informed uh to your observation it's completely right and the straight of foremost never was completely closed there was always leakage there was always smuggling there were always dark fleets Iranian ships but also other ships.

[00:05:54]>> If we do the calculations, it is quite astonishing how flexible the market actually is. There was this huge hit of a total of almost 20 or more than 20 million barrels oil and oil products. Uh the IIA has said famously the biggest supply disruption in history. We don't know that because a supply disruption is volume times time. uh we only know in volume terms it is it is the highest one in absolute terms but depends how long it lasts but there was always leakage.

[00:06:22]Now if we do the numbers and you see uh all the sort of workarounds which have emerged just in the last few months the pipeline through Saudi Arabia has ratcheted up the pipeline transport through the UAE has ratcheted up there's small but still you know truck traffic through Iraq to Syria of approaching 200,000 barrels per day. there is more production in other parts of the world and there is an enormous demand reaction in China and elsewhere. So if you do the numbers you could say that this the hit and the trade of for was taken uh quite well by the by the markets and therefore had very limited economic implications.

[00:07:02]But you know the problem with these kind of things and also with the lower importance of oil prices, the fact that prices have to go up much higher to cause real economic damage, it may not be a reason to rejoice because it may just be a reason to induce politicians to take more risks. And this is what seems to have happened here. People are telling the American president, don't worry, you know, the world doesn't collapse at an oil price of 1995. And then he doubled up you know and probably Iran is also aware that the strait is useful only as long as it's a major transport road. If too many surrounding things are being built then it loses its value. And so they all play this game.

[00:07:40]They see the impact is lower than expected and then they go one round further. That's the risk we are facing.

[00:07:46]The difference is to the present situation is there is never total security in oil trade. But oil pipelines are no panacea in particular because pipelines are hard to defend and easy to attack. And once you have physical damage in pipelines, you may have a long-term >> that's a different story >> and that would change the game and that would make the impact on oil prices worse than what we have seen by just threatening disruptions through this trade.

[00:08:13]>> Okay. Can you uh quantify that in layman's terms because the way we understand it is you know the hormuz uh is through which 20% of the global oil passes through um how much actually did end up passing through um how much was actually blockaded um and now with this new development with the Houthi attacks um how much more uh how much less of oil is going to be passing through globally >> there are estimates of that and their observations of that and the difficulty is that of course it goes up and down on a almost daily basis and certainly on a weekly and monthly basis.

[00:08:53]>> If we translate these figures into barrels per day as a yearly average to have some sort of common denominator, common benchmark >> estimates are that about between 1 and a half and two and a half million barrels per day pass through the straits even in its darkest moments. So we should during the war so we should think that uh going forward it's a safe assumption that that kind of leakage will persist >> and on the other side of it when we look at what goes through the pipelines in Saudi Arabia and in the UAE alone without even looking at production increases elsewhere in the system then we are talking about maybe six to 7 million barrels per day of which of course the pipelines were in use before so only a share of that is incremental uh and then It depends where we have to look. The the numbers add up to still being a gap being there of maybe 5 million plus minus which needs to be bridged if the disruptions continue and if all the workarounds continue to grow and if inventories remain available and if uh production increases elsewhere are forthcoming that means the disruption is still high enough that there is a need for demand to react. That's the important magnitude here. We are not in a position where workarounds can compensate for the entire uh disruption even of the trade alone. And that means either inventories will have to continue to run down and that of course is a limited safety valve or demand has to react. Demand has reacted. Demand is estimated by the IEA of having been down about almost 5 million barrels per day in the first quarter in the second quarter. [snorts] And that's the kind of magnitude which we need to balance the demand. And now of the market the gap which needs to be plugged has been plugged by demand declines. Now the question of course is is that a permanent adjustment of demand or is it just a temporary reaction and uh the full numbers we will only get once this disturbance is over but historically once we had a big impact on demand at least part of that tends to be permanent.

[00:11:01]>> But let let's I'll press you on that demanddriven issue. Is that uh because of the global economic slowdown or as you mentioned earlier uh in the program you mentioned something about us not actually or the world not having as much energy or demand for oil as initially uh expected.

[00:11:22]>> This is the this is the interesting part of that at least in my book. What we observe year after year after year is a continued improvement of what is called oil intensity. This is again the amount of oil you need to produce a a given amount of GDP. It has come down by 60% since the 1970s which is why the oil burden is a bit lighter and why one needs a much higher price uh in order to get the same impact either on economic growth or in inflation than than before.

[00:11:50]Something underestimated in in my view by by many.

[00:11:53]>> Sorry. Sorry. Is this because of the mix of um alternative uh or renewable energy? This is lately also because of the introduction of electric vehicles.

[00:12:03]But more than anything, it is just efficiency improvements.

[00:12:06]>> It is a bit of a mystery because it's a it proceeds for 30 40 years almost as a straight line. It's a very regular improvement.

[00:12:13]>> Right?

[00:12:14]>> And the explanation is that you know oil is something which always is used for some it's never nobody buys oil to drink it. So it always goes through some refining process and then through >> heaters or cars or whatever.

[00:12:26]>> Okay. And these days it's an effect of globalization. If somebody in India invents an efficiency improvement for a car within two months it's applied everywhere in the world. Right? Or if somebody were to invent a more efficient way of heating then it would spread around the world very fast. Okay.

[00:12:42]>> And it's these kind of efficiency improvements in the way we use oil plus the elimination plus substitution so that wherever an oil is expensive wherever it can be substituted for heating can be substituted with coal it will be substituted. And so >> and this despite the growth um the industrialization in general that requires more energy. Okay, >> these efficiency improvements are not demand. It's not lowering demand. Global demand increases but these are efficiency improvements per dollar of GDP. So per unit of GDP we need less oil and uh what we have seen now according to preliminary calculations for 2026 if you just take a standard economic growth forecast and a standard IIA forecast and oil demand is a massive jump in oil efficiency as it responds to the crisis in in numbers.

[00:13:33]If we were to produce the 2026 expected global GDP with the oil intensity of 2025 of last year, we would need 3.6 million barrels more than we need with the current intensity.

[00:13:48]>> Right? So that's the efficiency we are saving. If if the economists are right and global GDP 26 is what it's expected to be, we can do it with 3.6 million less oil than if we would have last year's technologies. That's a lot of oil and that explains why the market could adjust relatively easily. Now again, is that permanent? Is it is it lasting?

[00:14:12]That's more or less a question of how much of it is Chinese inventory depletion versus a genuine decline in Chinese demand. We don't know the answer to that because the numbers are not public.

[00:14:24]>> Okay. Well, let's talk about the whether this would then impact global uh inflation or whether as you mentioned um economies could quickly also adjust to that if the need for oil um could you know is is less and more efficiencies could be happening. And and to your point, there was an article at least in Bloomberg saying that that China managed to to adjust with the EV um situation quite quickly um and reduce the reliance on on West Asia um in terms of importing oil. So tell us uh your views on that and whether the world will be adjusting and inflation won't be spiking as much as as as feared >> on China. What we know is that a large chunk was but the bulk of the demand decline when it comes to single sources is a decline in oil imports into China that we know. We don't know do they import less oil because they use less or do they import less oil because they draw down their reserves their strategic reserves >> and the truth will be somewhere in the middle and that's uh you know that's something which has to wait for for more clarification on the numbers. In generally speaking, the more the energy oil intensity improves, the less impact a given oil price has on the economy.

[00:15:41]And traditionally, there are two ways in which high oil prices affect the economy. One is directly because people spend more on oil. They have much less money available to buy consumption goods or do investments and what have you. And so it's a loss of purchasing power. It's a decline in agriculture demand because oil has become more important, expensive and and that hurts economic growth directly and the other is indirectly because oil goes into almost any commercial activity we do. So an increase in its price feeds through and increases potentially inflation and that calls for central bank action raising interest rates bringing down investments cooling the economy and again has an adverse effect on economic growth. These are the two main channels. Now this complicated technical thing which I was trying to explain earlier about improvement in energy intensity means that both of these channels these transmission mechanisms are weaker >> at a given price less impact on economic growth directly and less impact on inflation directly and therefore economic growth indirectly. So that's good news and now close >> good news. Do you have some level of outlook or estimate um in terms of the the prices um of oil?

[00:16:53]>> I still think that uh many of the we have to get used to the fact that oil prices adjusted for inflation and for these efficiency improvements are not really very high. So they have a lot of runway before there would be a detrimental economic effect. It's one of these puzzles people always ask. So how come that the global economy is still in good shapes shape? We have this bubble w b w b w b w b w b w b w b w b w b w b wobbling on the stock market. We have the tariff threat. We have the energy shocks. All these things >> by all accounts the global economy should be on its knees by now and it isn't. And one of the puzzles for that is that the impact of the high energy prices and oil in particular prices has been less than expected. Uh is less for for very good reasons. There may be similar reasons for the role of government and tariffs. I don't know. Uh and so I think the and like every piece of bad news has some good news. It's also true the other way around unfortunately. So the bad news in that good news is that this may well embolden people who are currently busy feel making war uh to push the system more to the new limits rather than backing off and using the time for a break and for peace negotiations. That's the risk we are facing. But also would you think that the economies are disproportionately impacted in terms of you know the situation wherein the poorer countries would definitely feel the pinch much more >> most certainly I mean there's two two disproportionate asymmetries here one is that countries which are poorer and which have a lot of especially those who have a higher intensity are disproportionately affected I mean a lot of driving which is officially registered as driving in in a poor country in reality is small businesses doing deliveries and doing things like that right [snorts] >> they will be immediately affected much worse than than rich countries. So that that is one effect. The other is when you think of these enormous improvements over the last three four decades having to do with substitution that means that most of the oil activities which can be done by other fuels have been crowded out already. It also means that the remaining barrels are economically very important. So if the prices were to high to rise high enough that some of these barrels would be would be lost then you probably get a breakdown in economic efficiency and activity which is much much more pronounced than what we were used to when it was just about substituting on a low level. we would get a hard a higher effect on economic growth which would not only be the loss in purchasing power anymore. But the fact that loadbearing barrels, barrels which are used where they cannot be replaced for transport, for flying, for shipping, if they went missing because supply has been cut, then you would see the cascading effects through the economy and economic activity being much harder affected. that would be much more in the nature of a crisis and much much less predictable than our current sort of slow effect on growth of higher oil prices. So these are two asymmetries in the system and we haven't we haven't really tested the upper boundary yet and hopefully we won't >> and of course the the sectors that are just directly affected uh you know apart from transport aviation uh and people spending less on travel, tourism um you know as a secondary effect on that. But yeah so many things to be discussing here um on the back of those rising oil prices once again above 100 a barrel.

[00:20:16]Thank you so much for your time and insights today. Professor Kristoff Rule, energy economist and senior research scholar over at Columbia University.

[00:20:24]Thank you, bro.

[00:20:24]>> My pleasure. Thank you. Thanks for having me.

[00:20:55]was there.