A Nobel Prize winner has warned there could be further spikes in the cost of oil, and it would be far worse than predicted.
Paul Krugman believes estimates from experts predicting how high the cost of oil will reach could be understating just how expensive it could get. Writing in his recent Substack post, the economist suggested there is a chance that oil prices could spike much higher than either experts or Donald Trump's administration will admit.
Krugman claimed, "Given time to adjust, the world can conserve oil in many different ways. For example, gas mileage roughly doubled in the decades that followed the 70s oil shocks — and that was before hybrid and electric vehicles. In the long run, the world economy could make do without Persian Gulf oil, at minimal cost in terms of global GDP.
"But in the long run we are all dead. In the short run, the economic impact of a sustained loss of Gulf oil could be very ugly. In fact, it would have to get ugly to persuade the world to buy a lot less oil."
"I’ve seen some alarmists warn that a long war in the Gulf could lead to oil at $150 a barrel. That looks low to me." Though Krugman's opinion may be a rude awakening for some, the economist believes change will only come if the price hike persuades people to give up driving.
He wrote, "Around 20 percent of the world’s normal flow of oil is bottled up inside the Strait of Hormuz — and as we’ve seen in the past day, even tankers and oil facilities inside the Strait are vulnerable to attack. If this blockade persists, it will be a much worse shock to world oil supplies than the 1973 embargo, the 1979 Iranian revolution, or the 2022 Russian invasion of Ukraine."
"So what happens if the Strait remains closed for months? It’s a matter of supply and demand. If the quantity of oil supplied to world markets can’t rise — which, as far as we can tell, it won’t until the mullahs decide to let tankers through again — the price of oil will have to rise high enough to reduce the quantity demanded."
"And how high would that price have to be? It would have to be high enough to persuade drivers to stop driving, trucks to stop trucking, airlines to stop flying."
"In other words, the price of oil would have to rise enough to cause a global economic crisis even though the world is much less oil-dependent than it used to be."