The increase in demand and the supply crunch have led to oil prices hitting their highest level in years.
Oil prices increased by more than 60%, with West Texas Intermediate crude even jumping to a seven-year high on Friday.
The situation in Europe is even worse with natural gas prices tripling this year. Also, thermal coal futures in China are at all-time highs.
Head of Global Commodities and Derivatives Research at Bank of America, Francisco Blanch sees four possible paths for the energy market.
1. Rising energy prices will lead to recession
Blanch based this statement on a comparison of the current energy crisis and the rise in oil prices between 2007-2008. At the beginning of the year 2007, the price for one barrel of Brent crude oil was $50, which then doubled to $95.98 at the end of the same year. By July of 2008, the price reached its all-time high level, increasing to $150 for a barrel. If the situation repeats, a spike in energy prices may force many of industrial companies to limit their activity and, worst scenario, to shut their businesses.
2. More production or substitution
Blanch said that more expensive goods will force producers to increase production or find some alternatives.
Now, as the gas and coal prices increase, some companies started using oil as a substitute. According to the International Energy Agency this may increase global demand to oil barrels to around 500,000 a day.
3. A warmer winter may temporarily delay the crisis
As energy prices are increasing ahead of winter, a warm winter may temporarily cure the problem, as the demand will slide.
4. Raising interest rates will slow aggregate demand
Central Bank by increasing interest rates can slow down aggregate demand as this will cool growth and energy consumption.
Federal Reserve officials have already planned taper bond purchases at the end of this year and to increase interest rates next year.
"Remember, you can print US dollars, you can print euros, and you can print Philippine pesos. But you can't print commodities," says Blanch. (Business Insider, 2021)
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*Lee, Isabelle (17 October 2021). Business Insider: The global energy crisis has 4 possible paths through early 2022, says Bank of America. Last viewed on 18.10.2021 on https://markets.businessinsider.com/news/commodities/oil-price-outlook-global-energy-crisis-oil-gas-coal-bofa-2021-10
