If this keeps going for two weeks, three weeks, four weeks, five weeks, what do you think happens to the U.S. economy? What do you think happens to the global economy? What happens if this begins to cascade? I think we haven’t seen anything yet in terms of where I expect oil prices would go if this goes on for weeks longer, because as I said, you really do need prices eventually to — the physical reality catches up. You need prices to rise high enough to actually destroy demand. And that’s hard to do. What does destroy demand mean? It means everyone figures out how to do something other than buy gasoline. So you’re going to drive your car less. We saw the C.E.O. of United Airlines the other day say they were going to start to idle some of their flights, the flights that maybe get a little less revenue, like Tuesday, Wednesday, Thursday rather than on the weekend. The flights that aren’t as profitable, they’re going to stop flying as many airplanes, and some industrial factory is going to shut down. We’re already seeing countries that struggle to afford high prices, in Southeast Asia — Thailand, Indonesia, Malaysia. Countries like that have announced work from home one day a week. They are having school closures. They’re putting in place emergency measures to cut fuel. So the question is how high a price do you need for the global economy to use something like 10 million barrels a day less of oil. And that’s a pretty high price. And in the 1970s, there was a little actually lower-hanging fruit. There were some opportunities to reduce oil use that were a bit easier. We’ve kind of gotten the low-hanging fruit out of the system. And so today, the things we use oil for, there’s not a huge number of substitutes in the near term. In the long term, obviously, you can buy an electric car instead of an internal-combustion engine, that sort of thing. But in the near term, there’s not that much you can do except shut down economic activity, maybe take the subway or bus instead of driving. And businesses will make different choices. The economist James Hamilton famously documented that basically every major oil shock of the 20th century preceded a recession. Do you think that’s likely to happen in this situation? Well, it depends how high oil prices go, of course. But if you’re talking about the kind of levels that would be needed to make 10 million barrels a day of oil demand go down, then yeah, that is the price level that could push the economy into recession. Because I think we think about this from the American perspective, where it would cause economic hardship and pain. It is hard to pay more at the pump. It is hard to pay more for a flight. But what will happen very quickly is that rich countries will begin bidding for scarcer energy supplies, and those supplies won’t make it to poorer countries who cannot pay the cost. So if this continues, I think there’s been a lot of talk about, say, recessionary risk in America. But we and Israel started this war. But if it continues, what happens to people in Malaysia or people in Kenya? Like, what is the cost that we are risking imposing on the two billion poorest people in the world who had no say in this? I mean, I think it has the potential to be really quite devastating. We saw that in the 2022 energy crisis, which was largely limited to natural gas. It didn’t affect oil markets as much. So when Europe lost access to natural gas from Russia, what did Europe do? It went into the global market for liquefied natural gas. That’s gas that can be traded more easily. And prices went through the roof. And like markets are supposed to do, the market allocated the supply to the people who could pay for it. So those flows went to Europe. And Europe paid a premium for it. And that meant that coal prices went up because coal was the substitute for the gas that would have otherwise gone to Asia. And so a country like China used more coal instead. But if you were a lower-income country or a middle-income country like Pakistan, Bangladesh, you struggle to afford any energy at all. And they really did start to see significant economic impacts, to shut down economic activity, to not be able to get around. We’re seeing in Pakistan now a huge cricket tournament, and they’re telling people to watch on television rather than go in person. India, about 3 percent of — oil spending is about 3 percent of GDP. Thailand it’s about 5 percent. Fossil fuels overall in Thailand are 7 percent. These are very large shares of the economy that are spent on fossil fuels, and nearly all of which is imported. And these are countries that don’t have the fiscal space to pay more. And we haven’t, again, even talked about the fact that the Strait of Hormuz is a critical chokepoint for fertilizer, and fertilizer has trouble getting to the market. You’re going to see potential impacts on food and food prices, and that puts enormous economic strain on countries that are already struggling to afford these essential products in the first place.
