Oil prices have started to fall, but not necessarily for reasons that suggest a return to normal in the markets.
The International Energy Agency said on Tuesday this “demand for destruction” began to manifest itself. Due to the severe shortage of energy raw materials resulting from the closure of the Strait of Hormuz, oil appears to have reached a point where it is now so expensive that foreign businesses and households have begun to curb investment and consumption.
Countries in Asia, Europe and even other parts of the Middle East that rely on supplies passing through the strait have begun reducing their use of natural gas, experienced waves of flight cancellations and implemented policies to reduce overall fuel consumption, the agency noted in the report.
This is a phenomenon likely to affect global economic growth. And while it doesn’t yet appear to affect the U.S. economy, any impact would threaten to destabilize an already fragile labor market.
The IEA believes that demand destruction could become a global trend.
“Demand destruction will expand as scarcity and rising prices persist,” he said.
The report comes as President Donald Trump announced a targeted blockade of the Strait of Hormuz in a bid to increase economic pressure on Iran. The global economy has so far proven resilient, but that could soon change.
Traders have started to absorb the new dynamic. The international price of a barrel fell to less than $98 after hitting $118, while U.S. crude fell to $95 a barrel after reaching around $113 earlier this month.
Gasoline prices in the United States have also started to show slight declines from recent highs, according to AAA data.
Although part of the decline is also due to hopes that the ceasefire announced last week will hold, the blockade imposed by Trump likely also plays a role.
As supply shortages worsen, demand will by definition have to decline.
“The resumption of flows through the Strait of Hormuz remains the most important variable in easing pressure on energy supplies, prices and the global economy,” the IEA said.
In a note to clients published March 31, Joseph Brusuelas, chief economist at consultancy RSM, discussed the lasting damage that demand destruction can have on the economy — and why restrictions on other key industrial inputs besides crude oil, whose prices are also rising, will also play a role.
“That means fewer cars sold, fewer homes bought, fewer restaurant meals, fewer business investments, and ultimately fewer jobs,” he wrote. “And since the Strait of Hormuz crisis is not just about oil, the demand destruction this time could go further than any standard model could predict. »
Thanks to changes in the economy since the 1970s, the potential impact on U.S. consumers may not be as great as in other regions, he said. More energy-efficient vehicles and working from home mean the U.S. economy uses about half as much energy per dollar of gross domestic product as it did in 1980, he said. Additionally, the United States is now a net producer of oil.
“There is a real buffer,” he writes.
On Tuesday’s latest earnings conference call, JP Morgan executives said they have yet to see U.S. consumers make significant changes in their consumption due to rising oil prices.
“It’s not nothing, but it’s not overwhelming,” said Chief Financial Officer Jeremy Barnum.
But Brusuelas warned that the United States would not be off the hook in a protracted conflict scenario.
“None of these buffers have ever been tested in the face of a disruption of this magnitude, affecting so many raw materials at once,” he wrote. “If the Strait remains closed after the summer, the probability of a recession would most likely be greater than 50%. »
