Global oil prices are beginning to retreat, but experts warn the decline stems from a dangerous trend of 'demand destruction' rather than market stabilization.
The International Energy Agency (IEA) reported Tuesday that acute energy shortages caused by the closure of the Strait of Hormuz have pushed prices to levels that are forcing overseas businesses and households to curb investment and consumption.
Countries across Asia, Europe, and parts of the Middle East are already curtailing natural gas use and implementing fuel reduction policies. The agency also noted waves of flight cancellations as a direct result of the supply squeeze.
Economic fallout
'Demand destruction will spread as scarcity and higher prices persist,' the IEA said in its latest report.
The price of a barrel has dropped to less than $98, down from recent highs of $118, while U.S. crude fell to $95 after hitting $113 earlier this month. While U.S. gasoline prices have shown slight declines, the underlying cause remains a lack of supply.
The energy crisis follows President Donald Trump's announcement of a targeted blockade of the Strait of Hormuz intended to increase economic pressure on Iran.
Joseph Brusuelas, chief economist at RSM consultancy, warned that the damage from demand destruction could outlast the immediate supply shock. He noted that the crisis involves more than just crude oil, as spikes in other industrial inputs threaten broader economic stability.
'It means fewer cars sold, fewer homes bought, fewer restaurant meals, fewer business investments, and eventually fewer jobs,' Bruselleas wrote in a client note published March 31.
While the U.S. economy currently maintains a buffer due to higher energy efficiency and its status as a net oil producer, Brusuelas cautioned that a prolonged conflict could trigger a recession. He estimated the probability of a recession would rise above 50% if the strait remains closed past the summer.
Currently, major financial institutions are not seeing immediate shifts in American spending. J.P. Morgan chief financial officer Jeremy Barnum stated during Tuesday's earnings call that executives have not yet seen U.S. consumers making significant changes in consumption due to higher oil prices.
'It’s not nothing, but it’s not overwhelming,' Barnum said.
'Resuming flows through the Strait of Hormuz remains the single most important variable in easing the pressure on energy supplies, prices and the global economy,' the IEA said.
