The geopolitical risk caused by the Russia-Ukraine conflict has led to an upward trend in international oil prices. New York NYMEX crude oil and London Brent crude oil prices rose to $130.50 per barrel and $139.13 per barrel respectively after the highest point this year, although there is a fall, both are still hovering at historical highs. The three oil crises experienced so far have all received the impact of wars, which were basically characterized by soaring oil prices, worsening inflation, and varying degrees of macroeconomic recession. In the first oil crisis caused by the war in the Middle East, the average price of oil nearly quadrupled. The U.S. inflation soared from 6% to 12.1%, and real GDP dropped from 6.32% to -2.3% year on year. The second oil crisis triggered by the Iran-Iraq War has pushed international oil prices from $13 to $41 per barrel. The third oil crisis triggered by the Gulf War led to a sharp climb in international oil prices from $14 to $42 per barrel, with U.S. inflation rising to 6.4% and the economy eventually squatting at a depth of -0.95%. Apparently, each oil crisis has had an adverse impact on the U.S. economy.

While rising international oil prices have left the U.S., a major oil consumer, with a lot of uncertainty about its economic future, it still cannot be defined as a fourth oil crisis. Theoretically, rising oil prices are bound to bring about rising costs for enterprises on the production side, and drive up logistics and transportation costs, which will eventually be transmitted to the consumer side to cause cost-driven inflation. Data show that since this year, U.S. inflation has continued to rise and hit a 40-year high, with gasoline prices contributing more than one-third of the CPI. More importantly, high oil prices will have a negative relationship with both consumption and investment. With the pressure of rising energy prices to transfer costs, consumers will automatically reduce spending on non-energy goods and services, while also forming an inflationary expectation effect, from the labor market wage increases will become increasingly strong. Consequently, the cost of business operation will increase and eventually force companies to reduce investment.

The latest statistics show that the U.S. domestic consumer confidence index has fallen to the lowest in nearly 10 years, and monthly average hourly earnings have increased the most in 40 years. And based on the suppression of consumption and investment due to inflation, the Federal Reserve has lowered this year’s U.S. economic growth from the original forecast of 4% to 2.8%.

Following the Federal Reserve predicted result, the U.S. economic growth rate this year is obviously weakened a lot, compared to the economic growth rate of 5.7% in 2021. But economic contraction obviously can not be equated with a recession. Based on economic momentum, employment status, and other actual indicators, it is premature to conclude that the U.S. economy is bound.

On the one hand, U.S. domestic crude oil production has now increased by as much as 60% compared to 10 million barrels 10 years ago, which significantly reduces the dependence on external crude oil markets. On the other hand, compared to the economic structure of any previous oil crisis, the U.S. service sector currently accounts for a much higher proportion. And the demand for oil is obviously not as strong and sensitive as the manufacturing sector. At the same time, along with the upgrading of the consumption structure, the weight of oil consumption in residential consumption is also decreasing. The direct effect of oil prices on inflation and the economy has been reduced as well.

A more noteworthy issue is that the repair of the U.S. job market continues to exceed expectations, with a standing shortfall of about 3.7 million non-farm payrolls and an unemployed population fluctuating above and below 1.8 million. Employment has always been in the buyer’s market, where the unemployment rate fell to 3.6% in March this year, and the overall job market condition has been close to the pre-outbreak level. The continuous improvement of the supply-side industrial chain and the follow-up of the increment of the consumption side have slowed down the pace and magnitude of the economic downturn to a certain extent.

Oil price is the main factor affecting U.S. inflation and the economy. From the oil supply side, the control of crude oil prices can avoid a new oil crisis. Although the U.S. has released about 90 million barrels of strategic reserve crude oil in the past two years to calm oil prices, the current stock of strategic reserve crude oil still has 568 million barrels. Therefore, Biden recently decided to release about 1 million barrels of oil per day from the strategic reserve for six months starting in May. And a total of 180 million barrels of crude oil in the coming months. Meanwhile, the IEA’s 31 member countries, which together hold nearly 1.5 billion barrels of crude oil reserves, recently reached an agreement to jointly release at least 50 million barrels of reserve crude oil to the market. Although it is said that the release of strategic reserve crude oil is not necessarily able to make oil prices retrace significantly, it can mitigate the adverse effects of oil price rising.

The suppressive force on oil prices from the demand side is also a cause for concern. On the one hand, based on the curb and suppression of domestic inflation, the Fed’s interest rate hike policy will push the dollar to appreciate. At the same time, the use of non-dollar currency investment to buy oil becomes more expensive, which may suppress demand and constitute a backward pull on the oil price trend. On the other hand, the new crown pneumonia is still ongoing and repeated, and the pace of world economic recovery is still under attack. The United Nations Conference on Trade and Development has lowered this year’s global economic growth forecast from 3.6% to 2.6%, which also brings the contraction of crude oil demand inevitable. According to the latest IEA forecast, the growth rate of global demand for oil will drop to 2.1 million barrels per day in 2022, a year-on-year decrease of 1.1 million barrels per day.

In addition to Russia, the U.S. and China have become the major countries to reduce the demand for crude oil. As long as the major countries maintain the stability of their oil demand, the unilateral upward trend of oil prices will be difficult to sustain. Accordingly, the risk of the oil crisis, which radiates to the U.S. economy and the global economy, will also be subject to a trend of flattening and convergence.

By Josie