GRACELIN BASKARAN: Oil is set to go through the roof as it barrels towards record

Goldman Sachs has called it one of the “largest energy supply shocks ever”. Oil prices are at $130 a barrel this week, dangerously close to the record high of $147.02 reached in July 2008. But forecasts show we’re headed towards shattering that record, with prices likely to top $200 a barrel.

Put another way, if the current loss of 3-million barrels per day (bpd) of Russian oil and petroleum exports continues, it will mark the fifth-largest one-month disruption since World War 2 — only behind the 1973 Arab oil embargo, the 1978 Iranian revolution, the Iran-Iraq war in 1980 and the Iraq-Kuwait war in 1990.

While we hope the damage stops there, history gives us a warning. Research by economists at the University of Warwick shows that nearly every global postwar recession was preceded by a sharp rise in oil prices. The cost of crude rose sharply in 1973, 1979, 1990 and 2007, all years that were followed by recessions.

The creep of economic crisis is here.  My initial question is whether we could have mitigated the severity of what we’re headed towards. To assess this, it’s important to note that there’s an importance difference between endowment and production. Though Venezuela has the world’s largest endowment, with 17.5% of proven oil reserves, it is not in the top 10 for production, partially because it remains sanctioned.

The distribution of oil reserves shows that ownership is heavily skewed towards countries run by autocrats. Venezuela’s dictator, Nicolas Maduro, controls 17.5% of the world’s oil reserves, followed by Saudi Arabia’s Mohammed bin Salman at 17.2%. Canada is in third place with 9.7%, followed by Iran and Iraq at 9.1% and 8.4%, respectively. Vladimir Putin’s Russia holds 6.2% of the world’s supply, followed by Kuwait, the UAE and the US, with 5.9%, 5.6% and 4%, respectively.

Geopolitically, here’s how they measure up:

• Venezuela: since 2019 the US has imposed heavy sanctions to deprive Maduro of cash and force him out of power after a fraudulent election. Nearly 60 countries recognise his opponent, Juan Guaido, as the real president.
• Saudi Arabia: without any democratic institutions in place, Bin Salman rules authoritatively. Saudi Aramco, 98.5% owned by government, is the world’s biggest oil company, outpacing Google and Apple as the world’s more profitable company. Saudi Arabia has declined requests from the US to increase oil production to reduce prices.
• Canada is the friend that gets along with everyone.
• Iran: the US imposed upwards of 960 economic sanctions on Iran to force it back to the nuclear negotiating table. The punishing effect is annual inflation over 42%, a currency that has depreciated by more than half over the past three years, and oil exports declining from 2.5-million bpd in 2017 to 1-million in 2022.
• Iraq has experienced substantial volatility over the past 30 years, particularly during its war with the US. Oil is an important economic bedrock.
• Russia: well, you know the answer to this.

The geopolitics of the oil industry is creating more pain points. Western countries are reducing their oil production on environmental grounds, but this increases the market share of countries such as Venezuela, Saudi Arabia, Iran and Russia, increasing their power. Together they control almost exactly 50% of the world’s supply. If the world is in panic over Russia’s 6.2%, imagine the pandemonium that could erupt if these countries decided to leverage their market power together.

The reliance on this autocratic structure has been embedded for decades. And it’s been a game of reallocating sanctions to ensure we can still meet oil supply. So don’t be surprised if sanctions on Maduro are reduced as they increase on Putin.

For consumer countries, seeing the rapid damage incurred by Putin has triggered a panic-induced spring to a diversified energy basket. France is constructing six new nuclear power plants (and considering eight more) in its effort to be totally energy independent. In Germany, economy minister Robert Haback has said electricity networks, liquefied natural gas (LNG) terminals and renewable energy will be built at “Tesla speed”. The country is constructing an LNG terminal in the north that should be operational within the next two years.

There will be long-term reverberations from the current energy shock, which is set to be the worst in history. But through proactive effort we can steadily reduce our reliance on tyrants and diversify our energy baskets for long-term supply and price stability. Renewable energy takes power away from the concentrated hands of autocrats. Not even Putin can keep the sun from shining or the wind from blowing.

• Dr Baskaran (@gracebaskaran), a development economist, is a bye-fellow in economics at the University of Cambridge.