Following Russian President Vladimir Putin’s order to enter separatist regions of eastern Ukraine, oil prices surged dramatically.
Western powers have been worried that Russia might use skirmishes in eastern Ukraine as an excuse to attack the eastern European democratic country, which has defied Moscow’s attempt to pull it into its orbit.
During an emergency meeting Monday night, members of the U.N. Security Council did not support Russian President, Vladimir Putin’s efforts to control separatists in eastern Ukraine.
The price of oil had already surged recently to its highest level since 2014. In electronic trading on Brent crude futures stayed relatively high around $90 per barrel by early Wednesday. Traders calculate that any significant disruption in Russian fossil fuel exports will cushion the impact of any Russian invasion of Ukraine and those prices could break above $100 a barrel.
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As economies slowly recover from the worst of the pandemic, demand for oil has outpaced production growth, leaving only a small buffer to mitigate a shock to oil supply.
Despite the latest crisis, the United States Federal Reserve was ready to raise interest rates to combat surging inflation that, in some ways, has made consumers feel as depressed as they were during the Great Recession of 2008-09.
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In fact, a full-scale invasion of Ukraine by Russia will leave many central banks scratching their heads. The immediate impact would be a further escalation of rampant inflation pressures globally.
Also, over the last year, global oil production has not kept up with the growth of demand despite the lingering pandemic, and in some important energy markets, such as Libya, Ecuador, and Kazakhstan, production has been disrupted by natural disasters and political turmoil.
It should be taken into consideration that low investment in exploration and production due to the pandemic, as well as a drop in investor interest in oil and gas for environmental reasons, has also amplified the shortage of oil and gas.
Asides from the easing of the Omicron variant of COVID19 and the resilience of labour markets reports in developed markets, the standoff with Russia has heightened concerns about the slowdown of a world economy hampered by snarled supply chains and high inflation.
Experts say things may get ugly if Russian oil supplies are cut off from Europe, which is 3 million barrels a day. The price of crude oil may raise another $10 to $15 a barrel, bringing Brent crude to about $110 a barrel.
Russia’s Energy Capacity
Russia plays a systemic role in energy market on the account that it’s the third largest oil producer, thus, the conflict in Ukraine could lead to a significant reduction in the flow of Russian barrels to the market, and further endanger the tight supply/demand balance.
Oil and natural gas are among the world’s most important resources, with Russia producing 17% of global natural gas and 12% of global oil.
Besides producing 11.7 million barrels of oil per day, which is approximately 10% of worldwide demand, Russia is the largest natural gas supplier to Europe.
Why Russia is not immune
British Prime Minister Boris Johnson addressed lawmakers in the House of Commons on Tuesday, saying the first tranche of sanctions targeted at the Russian economy would be targeted at Rossiya, IS Bank, General Bank, Promsvyazbank and Black Sea Bank.
Among the sanctions are sanctions against Gennady Timchenko, Boris Rotenberg, and Igor Rotenberg, three individuals with “very high net worth”.
There is already a “first tranche” of US sanctions in place against Russia for its actions, which include two large financial institutions, Russian sovereign debt and Russian elites and their families.
Several analysts agree that a war in Ukraine would hurt the Russian economy as much as the rest of the world, if not more, given the country’s reliance on energy.
Russia could still lose billions if Russia sticks to the present narrative. Thus, Russia’s energy companies will find it more challenging to raise funds as a result of the current situation, which destabilizes the markets and makes business less predictable.
Nord 2 pipeline project
Thus, Russia exports a significant quantity of natural gas, particularly to Europe, via pipelines that pass-through Ukraine.
As a consequence, the war would affect much of Europe’s natural gas supply, because Germany, the largest economy in Europe, has effectively suspended the Nord 2 pipeline project.
Russia’s state-owned energy giant, Gazprom owns the $11 billion Baltic Sea pipeline, which will link western Siberia to Germany and double the existing Nord Stream 1 pipeline’s capacity.
Neither the Russian nor German economies can afford to ignore the importance of the Nord Stream 2 pipeline. More than half of Russia’s exports are gas and oil. Around a quarter of Germany’s energy comes from gas, half of which comes from Russia.
In the past, the US had seen the pipeline as a geopolitical instrument for Moscow to undermine energy security and national security, giving it more leverage over Europe, where gas prices have risen.
Why it can likely affect you
In summary, if tensions continue to escalate and supply disruptions to Russia’s oil and gas supply continue, that will increase oil prices and then really hurt the global economy from both a production and a consumption standpoint.
The rise in oil prices benefits oil producers but raises the cost of everything else. Consumers and businesses alike cut back on spending as a result of higher oil prices.
Furthermore, high oil prices might discourage oil consumption – people might be more inclined to opt for fuel-efficient vehicles or electric vehicles, for instance, or to travel less.
The recent increase in gasoline prices coincides with a period when people in advanced markets drive fewer miles amid the winter season. Among energy experts, this is concerning as seasonal price increases are not very far away.
Lower-income families particularly at emerged markets would bear most of the burden since they spend a greater percentage of their household budget on gasoline.
Though on a brighter note for environmentalists, high oil and gas prices encourage companies in electricity markets to look for cheaper alternatives, such as wind and solar power.