The experience of the 1970s suggests that the ongoing war in Ukraine and its effects on commodity prices will reshape commodity markets for years to come,' said Capital Economics commodities economist Kieran Clancy said in a report published Tuesday.
The long-term consequences that stand out include demand destruction and new energy independence goals.
'Elevated prices are likely to lead to some degree of demand destruction. And further ahead, a renewed focus on energy independence in Europe and elsewhere will have longer-lived consequences for commodity demand and supply,' Clancy wrote.
There are apparent similarities between what's happening now and the oil price shock of the 1970s.
'From October 1973 to March 1974, OPEC halted exports to many Western countries as punishment for providing aid to Israel during the Yom Kippur war. Not only did oil prices surge back then, but so too did the prices of other commodities as higher energy prices raised production costs,' Clancy explained. 'We're seeing something similar this time around stemming from the war in Ukraine, both in terms of the speed and the scale of the rise in commodity prices.'
The main reasons behind the latest oil price surge above $100 a barrel are concerns around supply and longer-term impacts on other commodities. This is very similar to what happened in the 1970s.
'One striking similarity between the 1973/74 oil price shock and the war in Ukraine is the effect on energy policy. In 1973/74, the U.S. responded to the sudden loss of OPEC supply by accelerating efforts towards energy independence, and we're seeing something similar across the West this time around,' Clancy pointed out. 'For example, the European Commission has already announced plans to make Europe independent from Russian fossil fuels before 2030, which is likely to accelerate the shift towards renewable energy in the years ahead.'
Another similarity is a lack of existing supplies to make up for current disruptions. 'Back then, the OPEC embargo came at a time when oil producers in the U.S. were already running close to capacity. And despite the shale boom since then, drilling activity in the U.S. is yet to point to a forthcoming surge in output,' noted Clancy.
And so far, OPEC has denied requests to make up for the loss of Russia's supply and boost production quickly.
'It seems likely that commodity prices will remain elevated for some time, as was the case following the initial shock in 1973. High prices could start to see an increasingly negative impact on demand, but it is hard to imagine this offsetting the upward pressure on prices stemming from lower supply,' Clancy added. 'Nevertheless … it is too early to rule out a surge in shale output altogether, as investment could still rise substantially in the months ahead. And although it has held firm so far, OPEC is facing growing pressure to utilize its significant spare capacity.'