(Kitco News) If the lessons of the 1970s were to be applied to today’s geopolitical situation, commodity markets could be transformed by war in Ukraine, according to Capital Economics.
“The experience of the 1970s suggests that the ongoing war in Ukraine and its effects on commodity prices will reshape commodity markets for years to come,” said Capital Economics commodity economist, Kieran Clancy, in a report released Tuesday.
Long-term consequences that stand out include demand destruction and new energy independence goals.
“High prices are likely to lead to some demand destruction. And going forward, renewed interest in energy independence in Europe and elsewhere will have longer-term consequences on demand and supply. raw materials,” Clancy wrote.
There are apparent similarities between what is happening now and the oil price shock of the 1970s.
“From October 1973 to March 1974, OPEC halted exports to many Western countries as punishment for providing aid to Israel during the Yom Kippur War. Not only did oil prices soar at the time, but the prices of other raw materials have also increased due to higher energy prices and increased production costs,” Clancy explained. “We are seeing something similar this time as a result of the war in Ukraine, both in terms of the speed and magnitude of the rise in commodity prices.”
The main reasons for the latest surge in oil prices above $100 a barrel are supply concerns and longer-term impacts on other commodities. It’s very similar to what happened in the 1970s.
“A striking similarity between the oil price shock of 1973/74 and the war in Ukraine is the effect on energy policy. In 1973/74 the United States responded to the sudden loss of supply from the OPEC by accelerating efforts towards energy independence, and we see something similar across the West this time around,” Clancy pointed out. “For example, the European Commission has already announced plans to make Europe independent of Russian fossil fuels before 2030, which should accelerate the transition to renewable energy in the years to come.”
Another similarity is the lack of existing supplies to offset current disruptions. “At the time, the OPEC embargo came at a time when oil producers in the United States were already operating near capacity. And despite the shale boom since then, drilling activity in the United States United States does not yet indicate an upcoming production increase,” Clancy noted.
And so far, OPEC has rejected demands to make up for Russia’s lost supply and rapidly ramp up production.
“It seems likely that commodity prices will remain high for some time, as they did after the initial shock of 1973. High prices may begin to have an increasingly negative impact on demand, but it is difficult to imagine that this offsets the upward pressure on prices resulting from lower supply,” Clancy added. could still increase considerably in the coming months. And although they have resisted so far, OPEC is facing growing pressure to use its significant spare capacity.”
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