The oil market has changed substantially over the past ten years.

The most important factor that explains the lower volatility and price impact in the face of geopolitical risks is that the United States no longer depends on OPEC. At the end of 2019, the United States reached a record in oil production, more than 12 million barrels a day, above Russia, 10.8 million barrels a day, and Saydu Arabia, 10.3 million barrels a day. The United States’ dependence on foreign oil purchases is the lowest ever, and if we consider North America (Canada. US and Mexico), the region is almost self-sufficient.

The United States has gone from being the largest oil importer to an exporter and, in addition, its economic growth is less and less energy-intensive. The energy intensity of US economic growth has been reduced to less than a third of the 1973 figure, according to the EIA.

It should not surprise us, therefore, that the chain of geopolitical risks, including the attack on Saudi Arabia, Iran tensions, disasters in Venezuela, Libya or Nigeria, keep prices well below what many OPEC producers would like. The weak reaction of prices is not just amazing in the face of a chain of geopolitical risks, but because OPEC and Russia have carried out the largest production cut in its history, which already exceeds 1.7 million barrels a day. To almost anyone watching the oil markets, it is extraordinary to see that, despite geopolitical risks and a massive production cut, oil remains below 70 dollars per barrel.

There are several factors to consider. The long-term curve explains a lot about the structural challenges of the oil market. It has been flattening for months due to the evidence of structural overcapacity and technological change. According to the International Energy Agency, efficiency destroys every year almost half a million barrels a day of potential demand. Additionally, the change in global growth patterns, disruptive technologies and the political push for decarbonization limit price volatility. It is not that oil is going to disappear from the energy mix, but that price fluctuations and energy intensity of growth are falling dramatically all over the world.

The United States produces a record amount but efficiency is also important. Production costs of its unconventional wells have been halved to an average of $40 per barrel in less than a decade. Additionally, OPEC maintains 2.5 million barrels per day of excess capacity that it can inject in the market at any time. Another important factor is the level of inventories, crude in storage. Global inventories remain firmly on the average of the last five years, and exceed 1,500 million barrels, according to the EIA.

All these factors limit the risk of an oil shock that could generate negative effects on the global economy.

However, we must not lose sight of inflation. After years of downward revisions, inflation expectations are bouncing back while at the same time consensus is cutting global growth estimates. We must pay attention, therefore, to the risk of stagflation (economic stagnation with inflation) since no government or central bank has tools to combat this risk, which is negative for consumption, investment, tax revenues and can generate multi-million dollar losses in income portfolios fixed.

Last year we saw a similar increase in inflation expectations in the first months of the year, but inflationary pressures vanished in the second part of 2019. It is difficult to contemplate an inflationary scenario in 2020 for three reasons: technology and the democratization of information in price formation prevent aggressive inflation rebounds, but at the same time we must bear in mind that overcapacity and excess debt, which has soared in 2019, are also powerful anti-inflationary forces. While headline inflation figures remain low, huge inflation is being generated in non-replicable goods and risky assets. That is why we have to monitor the risk of stagflation.

Meanwhile, the risk of an aggressive shock in oil prices is very low and unlikely to trigger a crisis. According to estimates by UBS and Goldman Sachs, the sensitivity of the European economy to an increase of $10 in the price of the barrel for twelve months is less than 0.2% of GDP.

An oil shock may be unlikely, but stagnation despite headline low inflation is not something to disregard.