Introduction#

The recent rise in oil and gas prices due to the conflict with Iran has led to comparisons with the energy crisis following Russia's invasion of Ukraine in 2022. However, economist Neil Shearing from Capital Economics argues that the current situation is distinct in several important ways.

Scale of the Shock#

One major difference is the scale of the current energy shock. The Strait of Hormuz is a vital route for global energy, accounting for about 25% of the world's oil trade and 20% of natural gas shipments. If this route were to be closed for an extended period, it could lead to a disruption even larger than the loss of Russian energy supplies experienced in 2022. Despite this potential, market reactions have been relatively stable, with oil prices briefly reaching $120 per barrel but stabilizing in the mid-$80s to high-$90s range. Natural gas prices have also increased less dramatically than they did during the previous crisis.

Economic Conditions#

Another significant difference lies in the broader economic environment. In 2022, labor markets were very tight, and inflation expectations were high, allowing companies to easily pass on rising costs to consumers. Today, the labor market is more relaxed, and inflation expectations have decreased, making it harder for businesses to transfer higher costs to consumers. This shift means that the economic conditions that facilitated cost increases in 2022 are less favorable now.

Policy Responses#

The policy landscape has also changed. In 2022, interest rates were near zero in many advanced economies, forcing central banks to react aggressively to rising inflation. Currently, interest rates are closer to neutral in the eurozone and somewhat restrictive in the U.S. and U.K. This means that central banks are not starting from an overly loose monetary policy, which could lead to a more measured response to the current energy crisis.

Conclusion#

Shearing emphasizes that the lessons learned from the previous crisis suggest that broad energy subsidies are costly and should only be used in extreme situations. Instead, support should be focused on the most vulnerable households. Markets have already adjusted their expectations for interest rate cuts, which Shearing believes is a reasonable response given the current economic climate.