DWS || Back in March 1918, a few months after the “October Revolution”, Vladimir Ilich Lenin expressed it bluntly: in a matter of days, months, and weeks, Russia had gone through historical stages that took other countries decades. Oil markets can give a very similar sensation, as our chart of the week shows. The line shows the inflation-adjusted (i.e., real) price of Brent over time. According to this indicator, the latest movement is significant, but not extraordinary. Even after the recent Middle East crisis, real oil prices still seem less dramatic than some previous peaks.
The bars reveal the more interesting story. They represent the proportion of each quarter in the total “trading time”, using a practical indicator based on realised variance. In other words, periods with large daily fluctuations absorb a disproportionate part of the market tension. This is important because oil crises do not just lead to an increase in prices at the pump. They can also change behaviours. When volatility accumulates, households, car manufacturers, and regulators stop treating oil as a stable input and begin to consider it a risk. The oil crises of the 1970s contributed to driving improvements in efficiency and substitution. A prolonged crisis today would likely favour electric vehicles (EVs), heat pumps, and other forms of electrification. In that sense, demand destruction and electrification are not alternatives. They are part of the same adjustment on the demand side.
Oil is atypical for another reason. Supply does not always respond as it does in competitive, profit-oriented commodity markets. The Organization of the Petroleum Exporting Countries (OPEC) still accounts for about a third of global crude production, nearly half of internationally traded oil, and almost all excess capacity, while national oil companies remain dominant in many producing countries. This means that fiscal and strategic incentives can be as important as profits, and can maintain tension after the initial impact.
“All this shows that it makes sense to look beyond the headlines,” argues Darwei Kung, Head of Investment Strategy in Liquid Real Assets at DWS. “The evolution of the markets shows that, while overall stress remains below extreme levels of the past, it is largely concentrated in brief bursts. In the case of oil, even moderate turbulence—when compressed into a few weeks—can have an outsized impact on behaviour and demand.” A few turbulent weeks can have the effect of years. And when it occurs, the lasting outcome is not necessarily a permanently higher price, but rather a decreased interest in oil itself.
