- When the price of crude blasts past US$120, it’s a big deal, and not just for consumers, but for every area of the economy.
- It’s entirely possible that as oil prices continue to rise, it could be a harbinger of the economic pain that is to come.
While most investors would associate the price of crude oil with what goes into our cars, trucks and planes, the price of black gold or Texas Tea actually affects everything from the price you pay for an air ticket to how much the toys under the tree cost at Christmas.
Oil is an important source of energy, but also an essential feedstock that goes into everything from plastics to chemicals used in every aspect of modern life.
So, when the price of crude blasts past US$120, it’s a big deal, and not just for consumers, but for every area of the economy.
The prospect of the European Union putting the kybosh on Russian crude exports, in retaliation for its unprovoked invasion of Ukraine, has propelled oil to its highest level in two months.
Brent Crude, the international benchmark, hit US$120.50 a barrel on Monday, ahead of the July contract’s expiry on Tuesday.
The rally in crude oil comes as supplies of refined products such as gasoline and diesel, remain tight at major delivery hubs and against a backdrop of rising demand, especially in the U.S., ahead of the summer driving season.
Almost all of the rise in oil prices can be attributed to the ongoing Russian invasion of Ukraine, which has seen Western allies shun crude cargoes coming from Russia and exacerbating already tight supplies.
By way of comparison, oil is just shy of its all-time high of US$147.50 a barrel, which it hit in 2008, before the Financial Crisis saw prices collapse soon after.
It’s entirely possible that as oil prices continue to rise, it could be a harbinger of the economic pain that is to come.
A combination of inflation, soaring energy prices, war and tightening central bank monetary policy could give way to a recession, something which markets don’t appear to be pricing in at the moment.
Oil prices affect consumption because already stretched consumers may dial back their consumption as more money buys less goods and services and discretionary expenditure such as travel either gets scaled down or given up altogether.