For those who get their jollies reading dry economic papers, the article “Historical Oil Shocks” by Hamilton, J. from the book “Handbook of Major Events in Economic History” is a good read. An extract of Hamilton’s chapter is available here
https://econweb.ucsd.edu/~jhamilto/oil_history.pdf (about 50 pages including references and charts). It is quite fascinating reading, starting at the first crude oil well in 1859.
While every oil price shock (and there have been several) are unique, there is some interesting characteristics of the 2022 event. First are the wild swings in global consumption due to COVID-19. It was only two years ago that the pump price in my area fell below a $1/l at one (brief) point in April 2020. Future oil prices were negative, and one couldn’t give the product away. By itself, this would discourage investing in more exploration and extraction. Second is the push by some to transition away from fossil fuels, including specific targeting of banks and financial institutions that supply funding for hydrocarbon exploration. Third has been the dynamic around Ukraine and Russian oil exports, coupled with those who are producing oil are (as it natural in a market economy) extracting as high a price as possible.
What is more interesting to me is the medium to longer term impact on consumer behaviour. In economists speak, consumer behaviour with hydrocarbon is relatively inelastic in the short term and reasonable elastic in the longer term. In other words, consider if one has a V8 GT-F and that is the daily driver to work. It is probably beyond a typical person’s economic means to swap vehicles. So, the driver has to accept the price increase. In economist speak, their ability to change behaviour in response to a change in price is relatively inelastic. However, in the longer term, they may respond by selling the GT-F and buying a Festiva diesel.
Unlike past oil price shocks, where consumers were restricted to moving along their demand curve, what is becoming available this time around is a substitute. (An example of a substitution of a product is buying Coke verses Pepsi.) The electric vehicle is looming as a good, but not perfect, substitute. Further, as the “fuel” is manufactured locally, it completely snips it clear the geopolitical issues. Yes, EV are expensive, but I do firmly believe that their cost will come down in time. Yes, the price of electricity is going up, but doings the maths indicates it is still much cheaper than hydrocarbon.
As for the price of oil, I will stick my neck out and make a prediction. Assuming the war in Ukraine does not become conflagrated, sooner or later it will come to an end. And when it does, Russia will be looking to rebuild its army, its economy, and its international currency reserves. That suggests it will be pumping as much hydrocarbon as it possibly can. In turn, leading to a decline, possibly a collapse, in oil pricing. As they say, watch this space …