The Week: Soaring oil price: is a recession inevitable?

The oil price hit new highs this week, as countries took steps to cut Russian oil out of their energy supply chain.


  • Oil shocks have traditionally been associated with recession
  • Oil is declining as a share of the global energy mix
  • However, oil still provides one-third of the world’s energy needs

As oil edges near $130 a barrel, many investors are getting a familiar, uncomfortable feeling. Oil prices have long been associated with economic peril. Oil price shocks have triggered many of the recessions of the 20th century. Is this likely to happen again? Or has the changing nature of our economies reduced our dependency on oil, leaving us less vulnerable?

Oil shocks have been associated with a number of major recessions. The 1973-74 OPEC embargo triggered tough economic problems. Recessions were also associated with the oil price shocks following the 1978-79 Iranian Revolution, the 1980 Iran-Iraq war and Saddam Hussein’s invasion of Kuwait in 1990. High oil prices act as a drain on consumer and corporate spending, leaving less money for investment and growth.

Will it be the same this time? Certainly, oil’s share of the primary energy mix is declining – from around 40% in 1995 to just over 30% today. The fall has been reasonably consistent. However, this isn’t as good as it may seem. Overall energy needs have been rising exponentially, so the overall need for oil has risen (https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy/primary-energy.html). It remains the largest chunk of the global energy mix, just ahead of coal, at 26% and natural gas at 25%.

The great energy transformation has barely started. Renewables are now around 6% of the overall energy mix, just behind hydroelectricity and just ahead of nuclear energy. Equally, the world continues to grow its energy needs. The pandemic brought about a small decline in energy needs, but this needs to be set against a near doubling of energy needs in the past thirty years.

If oil dependency is still high, this leaves the world vulnerable to rising prices. However, soaring prices are not inevitable. The International Energy Agency has said in the past few days that it can release additional oil stocks onto the market to ease prices, having already released 60m barrels last week. That said, OPEC has admitted that there isn’t enough oil capacity to compensate for the loss of Russian supply.

Even though the world has reduced its dependency on oil, this oil price shock could be pretty bad. The brave new dawn of energy self-reliance is a long way from being realised. The hope is that it forces policymakers to get their act together and improve their energy mix to ensure that they are not in thrall to the whimsy of dictators with oil reserves.