Synthetic fibres rely heavily (like most supply chains) on Oil, and the conflict in the Middle East presents a number of challenges for agricultural markets, here we take a look at the relationship of oil prices to merino wool and synthetic fibres.
Oil is a vital source of energy in modern economies, accounting for 40% of the combined oil, natural gas and coal used worldwide, which in turn account for 80% of energy supply (Interactive chart available here: Energy Consumption by source – OWD). While the oil intensity of modern economies has fallen substantially since the 1970s (Article available here: Oil and the global economy – Paul Krugman) there is still plenty of scope for an energy shock to potentially cause an economic downturn. For wool an economic downturn generally means weaker demand and lower prices.
The questions for the current situation are what defines an oil/energy shock, and the harder question, is this going to occur? Big changes in oil/energy prices are negatively correlated to economic growth and tend to precede rising/falling cycles in economic growth (Article available here: (Cheap Oil and Global Growth -Anatole Kaletsky).
Figure 1 shows the annual (calendar year) change in the World Bank average oil price (with the 2026 price using the current March value as part of the 2026 average to date) in US dollar terms and the year on year change in the merino price (in Australian dollar terms) to February. The graph runs from 1980 onwards. A rise in the oil price of 30% or more (we are talking about annual averages not daily spot prices which is what we will be hearing in the media at present), precedes a lower merino prices but not always. The wool market after 2000 when the oil price rose by 59% is the stand out exception. In 2002 the wool market experienced a classic pots stockpile supply shock, with price rising strongly (helped by a very weak exchange rate). As a rough rule of thumb then, a 30% rise or more in the oil price seems likely to cause problems for the merino price. As of this week the annual oil price for 2026 is up by 18% on the 2025 average.
On the second question, about whether the oil price will rise enough to cause a downturn in economic growth?, the answer lies in how long and how encompassing the conflict ends up being. Administrations across the world will be sensitive to rising energy prices especially if they feed into inflation and weaker equity markets.
Figure 2 compares the year on year change in oil price (as shown in Figure 1) with the year on year change in oil based synthetic apparel fibre prices. These fibres are sensitive to oil prices from both feedstock (input cost) and demand (economic growth) perspectives. As Figure 2 shows change in oil based synthetic fibre prices tend to be positively correlated with the oil price, indicating change in the feedstock price is the more important factor for these fibres. This means a rising oil price is likely to drag synthetic fibre prices higher, which is a positive for natural fibres such as wool and cotton.
What does it mean?
Substantially higher oil prices often lead to lower wool prices, but not always. They also usually lead to higher oil based synthetic fibre prices, which is useful for natural fibre prices. At this stage the oil prices has not reached shock levels. Whether it does, depends on how long the conflict with Iran continues. To say the least, it is a fluid situation with a lot of potential economic risk.
Key Points
- The oil price is on the way (up 18% for the year to date) causing a potential problem for economic growth and hence wool prices, but it is not there yet.
- Rising oil prices will lead to higher oil based synthetic fibre prices, helping offset any potential weaker demand for wool
Click on figure to expand
Click on figure to expand
Data sources: World Bank, RBA, Fibre Year, Emerging Textiles, Oilprice.com, AWEX, Ourworldindata.org, Paul Krugman, Project Syndicate, ICS, Mecardo
