As sanctions against Russian energy companies are finalized, the global economy is in for a shock.
Russia exports about 5 million barrels of oil per day. Some of that oil will find its way to markets around the world, but this is one of the largest oil shocks in history.
Goldman Sachs released research on previous oil shocks in the chart below. Circles highlight post-war disruptions in the price of oil.
Oil Shocks Throughout History
Source: Goldman Sachs.
A History of Oil Shocks
Early shocks resulted in fundamental shifts in the market.
The Arab oil embargo in 1973 led to OPEC’s rise and established those oil-producing countries as price setters.
In 1978, the Iranian revolution led to the near-total removal of a large producer from the global marketplace. It affected oil prices for years.
The Gulf War in the early 1990s temporarily removed oil from the market, but other producers stepped in to offset the loss.
The series of events related to Iraq and Venezuela in the early 2000s occurred as the trend was already up for oil prices. It created short-term volatility and seemed to have accelerated the existing trend.
The largest (and most recent) supply shock had no significant impact on prices.
In September 2019, drones were used to attack oil processing facilities at Abqaiq and Khurais in Saudi Arabia. The attack shut down half of Saudi Arabia’s oil production capacity. But the country was able to use reserves to maintain export levels until the facilities were repaired within weeks.
What to Expect After Russia’s Invasion
Sanctions against Russia seem to be most similar to the events that began in 2001. Supply was adversely affected at a time when prices were already rising.
Oil could continue higher unless the global economy slows.
That is the most likely outcome for now.
Inflationary pressures were already reducing consumer spending. Risks of recession were rising before the war.
Bottom line: An economic slowdown will decrease demand for oil, and that should offset the loss of Russian production.
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