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Oil Prices: From Geopolitical Shocks to Economic Implications

Oil prices have dropped after their 2022 highs, but challenges persist amid shifting market forces.

By Mark Metz, CFA,David Byrns, CFA

Key Takeaways

Oil prices have fallen since their peak a year ago, helping lower gas prices in an otherwise inflationary environment for consumers.

Demand for crude oil has weakened as China’s COVID-19 recovery didn’t pan out as expected, while Iran and Nigeria added supply to oil markets.

But oil prices have inched upward this summer as sentiment about the economy has improved, driving renewed demand.

The Impact of Geopolitical Shocks on Oil Prices

In late 2021, oil traded at just under $70 a barrel. It marked something of a recovery from the stunningly low prices at the onset of the coronavirus pandemic when gas prices sunk so low that oil producers paid buyers to have shipments taken off their hands.

Then about three months later, Russian military forces invaded Ukraine and just like that, geopolitical shocks sent oil prices soaring to $120 a barrel. It remained above $100 for about five months.

The Russia-Ukraine war goes on with no end in sight, but oil prices have steadily tapered off and returned to the $ 70-a-barrel range, about one-third off the peak price.

In some ways, current oil prices reflect a normalization from the price shocks brought on by Russia’s invasion of its neighbor. But that doesn’t tell the whole story.

Oil Prices and Their Influence on the Economy

Oil prices affect nearly every segment of the economy. When oil goes up, it seeps into the pricing of other commodities, goods and services. Businesses either pass the cost on to consumers or absorb it into their margins. Consumers pull back on spending.

Prices can also indicate how investors feel about what direction the economy is headed. Oil price spikes in the past have preceded recessions. In 2022, DataTrek Research’s Nick Colas noted that recessions in 1990, 2000 and 2008 occurred after oil prices increased 100% the year before. The 2022 jump didn’t double the price of oil but still amounted to a shock for the commodity.

Oil prices also affect gasoline prices. Crude oil accounts for half the price of a gallon of regular gasoline, which on average cost $3.85 in August 2023, according to the U.S. Energy Information Administration. That’s still high, considering historical levels, but just 8 cents less than the same time the previous year.

Gas prices stand out as one of the new positive developments in the otherwise tenacious inflation affecting U.S. consumers.

Factors Affecting Oil Prices: From Production to Demand

Wall Street expected oil to have a strong year, but banks like J.P. Morgan and Morgan Stanley retreated from their predictions of oil reaching $100 a barrel earlier this year.

It’s not the only missed forecast of the year: Predictions of an economic boom in China as it emerged from pandemic lockdowns have been disappointing — not bad, but disappointing. This accounts for some of the weaker-than-expected demand for oil.

Lingering worries about a recession in the U.S., a downturn that hasn’t yet materialized, also continue to cast a pall over oil prices.

The prospect of a recession, and whether it may even happen, frustrated an oil exploration and production executive responding to the Federal Reserve (Fed) Bank of Dallas’ energy survey in June.

“It just feels like everyone is waiting on this recession to come — like Jennifer Love Hewitt screaming, ‘What are you waiting for?’ in the movie ‘I Know What You Did Last Summer,’” one respondent said. “Oil prices seem to be trading like a financial instrument terrified of this pending recession instead of paying attention to supply-and-demand fundamentals, which are pointing to pretty strong draws headed our way.”1

Increased oil production from markets like Iran, Nigeria, Guyana and Venezuela helped reel in oil prices from their year-ago peak.

Another respondent to the Dallas Fed survey laid out the difficulties involved in producing oil at current prices.

“Expenses for everything have increased dramatically, while oil prices remain weak…” they said. “It seems as if the break-even price for oil is in the mid-$70-per-barrel range at this point. I would drill if costs were not so high.”

Where Will Oil Prices Go from Here?

The oil markets have given mixed signals so far. Prices remained stubbornly low for much of the year but have steadily increased over the summer. Brent crude, the global oil benchmark, stood at $85 per barrel in mid-August.2

For example, Saudi Arabia’s announcement that it would cut oil production by 1 million barrels daily on top of previously announced production cuts by the Organization of the Petroleum Exporting Countries (OPEC) hardly affected oil prices.

Saudi Arabia needs oil prices to increase to fund Crown Prince Mohammed bin Salman’s aggressive spending plan for modernizing the country’s economy and preparing it for a world without oil, whenever that occurs. The International Monetary Fund estimated that Saudi Arabia needs oil at $80 a barrel to balance its budget and meet its spending plans.

Months after its announcement, the effect of Saudi production cuts contributed to oil’s late-summer rally.

Saudi production cuts were the main change in oil’s supply dynamics. Also pushing oil prices higher were changes in updates to economic forecasts that have boosted its demand. Economists have largely walked back predictions of a recession later this year and given more credence to the possibility that the U.S. economy may achieve a soft landing.

The Federal Open Markets Committee (FOMC) meets again in September. Minutes from the Fed’s July meeting, when it raised interest rates by another 25 basis points, indicate that FOMC members have more confidence that the U.S. may avoid a recession. At the same time, the FOMC remains concerned that inflation continues to pose economic risks.

While the minutes offer no clarity about what the FOMC may do in September, most prognosticators think the improving economic outlook means the Fed is at or near the end of its monetary tightening cycle.

Consumers and businesses have read the tea leaves of a rosier economic outlook, and demand for oil has since picked up.

The International Energy Agency reported in August that world oil demand had approached record highs, thanks to strong summer air travel, the use of oil in generating power and strong Chinese petrochemical activity. According to the IEA, China, whose dour economic start to the year contributed to the fall of oil prices, accounts for more than 70% of the growth in global oil demand.

The IEA’s findings reflect comments by Saudi Aramco CEO Amin Nasser from June, who said that market fundamentals remain sound for the second half of the year and predicted that demand from China and India would offset economic risks in developed countries.3

Our Outlook

We remain positive on the energy sector due to improved business models and commodity prices that we expect to remain elevated relative to historical levels. Energy companies in the past had the habit of using increased revenues from high commodity prices to aggressively reinvest in more oil production or acquisitions, leaving little available for shareholders in the form of dividends or share buybacks.

In this cycle, we’ve seen a structural change in energy companies and how their management teams allocate capital. Many have capped spending and allowed increased revenues to flow back to shareholders.

This doesn’t change the cyclical nature of energy prices in general and oil prices in particular. We see a normalization of oil prices from the peaks of 2022. We also saw producers, particularly government-run oil companies in Nigeria and Iran and elsewhere, respond to higher oil prices rationally by investing in production to bring lower prices.


Mark Metz, CFA

Investment Analyst

David Byrns, CFA

Portfolio Manager

Senior Investment Analyst

Investment Outlook

View our latest Investment Outlook for a concise, easy-to-scan overview of current opportunities and risks created by today's global markets.

Kurt Abraham, “World oil analysis: Reasons abound for lackluster U.S. upstream performance,” World Oil, July 7, 2023.

Ines Ferré, “Oil prices to hit $91 by year-end, UBS says,” Yahoo Finance, August 16, 2023.

Muyu Xu and Emily Chow, “Saudi Aramco sees ‘sound’ oil outlook for second half on China, India demand,” Reuters, June 26, 2023.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.