When the number on the gas station sign ticks down, a driver feels a certain kind of relief. It is palpable in your shoulders. The slight retreat feels like the world is correcting itself after months of seeing prices rise above four dollars per gallon, breaking records no one could have predicted. However, if you speak with economists today, you’ll see that they’re not unwinding. If anything, they’ve begun to monitor the price of crude in the same way that you would monitor an abruptly breaking fever, which isn’t always a good sign and occasionally just the body running out of energy.
After the Iran War closed the Strait of Hormuz in late February, which is the chokepoint for about a fifth of the world’s seaborne oil, Brent crude surged this year. At the peak, prices surged toward $144. The reasoning was straightforward and brutal: according to one Kpler analyst, the biggest supply disruption in the history of the oil market ought to send prices skyrocketing. $200 was whispered in some forecasts. And yet here we are, with crude steadily declining and hovering far below its predicted level according to the math. The whole story lies in that gap.
The trade refers to the disturbing explanation as “demand destruction,” which is an ugly, almost violent term for a silent process. It indicates that economies and consumers have stopped purchasing because the price of oil has risen so much for so long that they have given up, not because it has become less expensive. In stark contrast to the growth it predicted just one month ago, the International Energy Agency now predicts that global oil demand will actually decline this year. Although oil briefly reached comparable highs during the 2009 financial crisis, JPMorgan’s estimates place the decline in demand at multiples of what the world experienced during that time. Factories are idle. Petrochemicals, aviation, and the freight that transports everything else all retreat.
It’s important to keep in mind why falling oil was enjoyable in the past. When prices plummeted in 2020, it wasn’t prosperity; rather, the pandemic was flattening the world economy. Those record-low prices were not presented as gifts. During the worst of the Great Recession, the same was true. Economists have a helpful old rule: never draw conclusions based on changes in prices. Until you figure out which lever caused the number to fall, it doesn’t tell you anything. It’s great to have cheaper oil because someone found a huge new field. Cheaper oil due to the global economy’s covert collapse is a different story.
The second- and third-order damage that isn’t visible in the oil charts is what makes this moment peculiar. Qatar stopped exporting helium, endangering the manufacturing of semiconductors. Food economists cautioned that the full impact on grocery prices might not show up for six months as fertilizer flows tightened. Consumer sentiment has declined, American wage growth has slowed, and job creation has flattened to almost nothing. The picture becomes more difficult to read rather than easier when an oil shock is added to an economy that is already operating on fumes. The world needs to be predictable in order to make any kind of prediction, and it hasn’t been that way lately.
The falling barrel poses a threat of its own to the major producers. Chevron’s breakeven point on Brent is close to fifty dollars. If you look below that line, you’ll see a familiar reaction: projects that have been put on hold, hiring that has been frozen, payrolls that are thinner, and debt that appears to be heavier on the books of the banks that hold it. A Goldilocks number—high enough to keep the oil majors solvent, low enough to spare everyone else—seems to be what investors want, though few will put it so bluntly. Markets seldom thread narrow windows elegantly, and that is a narrow window.
So be sure to keep an eye on the pump. Take pleasure in having a few dollars back in your pocket. However, it’s difficult to avoid the impression that this specific discount comes with a receipt that we haven’t read all the way through and that the bill might not be expressed in dollars per gallon when it arrives.
