The global prices of oil have been increasing even prior to the full escalation of the Russia-Ukraine War. However, when the Armed Forces of Russia crossed the borders of Ukraine to commence an outright invasion of the country in February 2022, the price of crude oil in the global market have skyrocketed from around USD 76.00 USD per barrel at the start of January 2022 to over USD 110.00 per barrel beginning on 4 March 2022.
Note that the conflict between the two countries started in 2014. But it was only in the latter part of 2021 when the situation worsened until it become a full-blown military confrontation beginning in 2022. Nevertheless, why does the 2022 invasion of Ukraine by Russia result in high oil prices around the world? How does the Russia-Ukraine War affect the global oil and gas supply? What is the importance of the Russian oil and gas industry?
Impact of Russia-Ukraine War in Global Oil and Gas Prices Explained
Several factors contribute to the current trend in the prices of oil and gas in the market. Analysts have explained that the price of crude oil was already inflated even before the Russia-Ukraine War escalation due to higher demands fueled by the recovery of global economies from the COVID-19 pandemic and low investment in the oil and gas industry.
But the invasion of Ukraine by Russia exacerbated the situation further. An analysis by Faisal Islam noted that the price of oil per barrel climbed to USD 139.00 at one point. This is the highest level for almost 14 years. In addition, the prices of wholesale gas for next-day delivery more than doubled following an armed encounter between Russia and Ukraine.
To understand further why the prices of oil and gas increased drastically after the escalation of the Russia-Ukraine War, it is important to understand that Russia is one of the biggest producers of oil and natural gas. The U.S. Energy Information Administration estimates noted that the Russian hydrocarbon industry was the third-largest oil producer in the world.
It also produced an average of 10.5 million barrels of liquid fuel products per day in 2020. Note that Saudi Arabia remains the largest oil producer in the world followed by the United States based on data from 2020. In addition, Russia was the second-largest producer of dry natural gas in 2020 with an output estimated at 22.5 trillion cubic feet.
Europe remains the main market for the oil and gas imports of Russia. A significant share of oil and gas imports consumed by the Europeans comes from this country. Hence, by extension, Europe is also the main source of revenue for the Russian hydrocarbon industry. The European Union acknowledges its dependency on the Russian hydrocarbon industry.
However, after the Russian Armed Forces invaded Ukraine in February 2022, several Western countries rolled out a series of economic sanctions aimed at crippling the Russian economy. The U.S. government under President Joe Biden signed an Executive Order banning imports of Russian oil, natural gas, and coal on 8 March 2022.
The United Kingdom also announced its intention to ban hydrocarbon products from Russia while phasing out total imports by end of 2022. The European Union also said it would cut Russian oil imports by two-thirds. Both the invasion of Ukraine and the series of reactions from Western countries sent the prices of oil and gas soaring.
Response of Affected Countries to Ease Expensive Oil and Gas
Note that the prices of goods are influenced generally by supply and demand. This has been true for oil and gas. The demand for hydrocarbon has increased as economies reopen and enter recovery phases. Hydrocarbon output before the invasion of Ukraine by Russia has stagnated due to low demand and stalled economic activity due to the COVID-19 pandemic.
The war between Russia and Ukraine affected further this output due to the economic sanctions and foreign policy directives issued by Western countries. The current situation exemplifies another important factor affecting the prices of oil and gas: international relations and geopolitics, as well as the foreign policy of influential countries.
A global disruption in oil and gas supply due to the Russia-Ukraine War affected not only the prices of these commodities but also every economic activity reliant on hydrocarbons. Stock exchanges in different markets also sank. These include exchanges in Germany and France, the FTSE 100 in London, and Dow Jones and S&P 500 in the U.S.
It is important to highlight the fact that several leaders of the European Union rejected the idea of banning Russian hydrocarbon imports. German Chancellor Olaf Scholz said that the E.U. deliberately exempted the hydrocarbon industry of Russia from sanctions. Netherlands Prime Minister Mark Rutte admitted that they remain dependent on Russia for energy.
Several strategies have been rolled out to deal with the impact of the Russia-Ukraine War on global oil and gas prices. Maciej Kolaczkowsk of the World Economic Forum said that members of the Organization for Economic Cooperation and Development are releasing 60 million barrels of oil in the global market from their strategic reserves.
These barrels are equivalent to 12 days of Russian exports. The United States is also tapping its strategic reserves to alleviate the rising gasoline prices. However, Kolaczkowsk warned that these initiatives have only short-lived and limited impact on prices. The global market needs a long-term strategy that would cover months or even years.
Other strategies include pressing oil and gas producers to increase their production output to meet the global demand. Countries that are considerably dependent on Russian hydrocarbon imports have also explored other importers. The situation has also prompted them to reexamine their energy security policy and their respective energy mix.
FURTHER READINGS AND REFERENCES
- Islam, F. 2022. “Ukraine Conflict: Petrol t Fresh Record as Oil and Gas Prices Soar.” BBC. Available online
- Kolaczkowski, M. 2022. “How Does the War in Ukraine Affect Oil Prices?” The World Economic Forum. Available online
- Energy Information Administration. 2022. Russia. Energy Information Administration, United States of America. Available online