Commodity oil supply shocks and recessions

 

When commodity price have rising and this volatile, there has been a recession. This type of up moves in commodities has not been seen in more than 45 years. While overall commodity prices are higher, oil price shocks, the main driver of commodity indices, have often preceded recessions. 

Just looking at oil prices suggest a high likelihood of recession, (see "The role of oil price shocks in causing US recessions") Of course, there has to be disentangling between demand and supply shocks and correlation issues versus causality, but the current run in prices over the last month are supply related and not driven by demand.

There was an oil price shock before the Ukraine War, 20+% in 2021 and 45% in 2022. A good portion of that pre-war increase was demand driven. Nevertheless, when we say supply shock, we should be precise. There is a logistics problem. Many buyers do not want to purchase Russia oil and it is selling at a discount. There is a supply disruption in the normal market logistics. There is also an uncertainty problem. The threat of future disruptions is leading to the desire to build inventories, a precautionary motive for holding oil.  

The overall impact is prices are elevated and they will not go down significantly even if there is a slowing of demand from a rise in interest rates from the Fed. Changes in US energy policy will not solve the short-term supply problem either. Businesses will have to live with higher energy costs.