Commentary: The oil market is moving into demand destruction mode

UNEVEN IMPACT

Unfortunately, there’s a limit to how far policymakers can manage demand destruction in an energy crisis with no end in view yet. Ultimately, soaring prices will play a significant part, and the impact of this will fall unequally.

In Africa and parts of Southwest and Southeast Asia, refined petroleum products are already expensive enough to limit purchases, reducing economic activity. Chemical and fertiliser factories are closing down there.  

Poorer nations will be priced out by richer ones or peers with the means to subsidise fuel prices and impose export bans.

Look at the distribution of the oil market: The US, Canada, Europe, Japan and China account for nearly 55 per cent of consumption. That means six out of 10 barrels of global use are in places that usually have the wherewithal to pay up.

Most of the initial demand destruction is going to happen elsewhere in places that simply can’t afford the prices. The burden will be firmly concentrated in Africa, Latin America and much of Asia. Over the next few weeks, if the war continues, fuel pumps will run dry and factories will close.

If the war lasts months, rather than weeks, this will no longer be enough. The crunch will need to move where oil is truly consumed: the industrialised nations of the world. An energy crisis is the product of two factors: the scale of the supply disruption and its length.

So far, the size is immense, but the timespan is short. For the sake of people’s lives in the war zones, and for both developing and developed economies, let’s hope the conflict is close to an end.