Ideas & Debate

Impact of Ukraine war on global supply of oil

oil
george wachira_img

Summary

  • Since Russia invaded Ukraine nearly three weeks ago, global oil supply dynamics (real and imagined) have shifted with oil prices swinging between $95 and $130 per barrel.
  • Upon the invasion, the West (USA, EU, UK ) imposed far-reaching economic sanctions against Russia, but these deliberately excluded Russian exports of oil and gas.
  • The UK on its part has set the end of 2022 to stop imports of Russian oil and gas.

Global oil markets are directly and indirectly interconnected, and any shift in supply or demand in one part of the world impacts the rest of the world, mostly in the form of price changes.

Since Russia invaded Ukraine nearly three weeks ago, global oil supply dynamics (real and imagined) have shifted with oil prices swinging between $95 and $130 per barrel finally steadying at around $110 early this week. And these price changes are already reflecting at retail pumps across the world.

Upon the invasion, the West (USA, EU, UK ) imposed far-reaching economic sanctions against Russia, but these deliberately excluded Russian exports of oil and gas.

The EU which currently imports about 40per cent of gas and 30 per cent of oil requirements from Russia, has set an ambitious target to reduce its energy imports from Russia by two-thirds by end of this year, followed by full severance of Russian supplies by 2027.

The UK on its part has set the end of 2022 to stop imports of Russian oil and gas. The US has already stopped all imports of Russian oil. Russia produces about 10 per cent of world oil.

For the EU, whatever reduction of oil and gas imports from Russia will have to be supplied from elsewhere, while reducing demands by conversion to alternative energy like renewables, or through energy efficiencies. Yes, there will be definite climate benefits from the Russian/Ukrainian crisis.

Specifically, the EU plans to accelerate energy transition from fossil fuels to renewables including electrification of transport. Further, Europe will invest in new LNG (liquefied natural gas ) regassification infrastructure for gas imports while signing up alternative offshore gas supply sources.

This is an opportunity for our regional neighbours Tanzania and Mozambique who will need to expedite their natural gas export projects. Yes, few months ago it was climate change driving energy debates, now it is energy security.

Definitely, the most devastating impact of the sanctions on Russia will be withdrawal of Western capital and technologies from Russia’s oil and gas industry. Already oil majors (Shell, BP, Exxon ) which have been in Russia since 1990s have announced their withdrawal from Russia.

Unless the more sympathetic China (and India ) decides to fill the capital void created by exiting Western firms, Russian oil and gas production and export market shares will plummet.

For oil importers outside the USA/Europe, the unavailability of SWIFT financial platform will make it difficult to trade in Russian oil and gas including provision of services like freight and insurance.

Other potential oil and gas buyers will simply keep off anything labelled Russia to minimise reputational and diplomatic risks, especially in relationships with the West.

Russia will certainly exploit all available tricks to circumvent sanctions by leveraging on existing geopolitical relationships, especially with China, a perceived Russian partner in an emerging global “cold war” with the West.

However, China is expected to exercise maximum prudence and restraint not to openly upset existing political/economic relations with trading partners who are sympathetic with the West.

Russia will also leverage the existing OPEC+ platform to maximise its oil export opportunities. Already the oil cartel has signaled that it will not alter existing oil export policies developed by the group.

It is also worth noting that Russia has over the past five years developed very close diplomatic and economic links with the Middle East oil producers. Specifically, Iran, Iraq and Saudi Arabia are unlikely to harm Russian interests during the sanctions.

As happened during the 1973 oil supply crisis, the world will immediately rearrange its supply/demand systems to go through the Russian/Ukrainian crisis.

However, oil and gas prices are bound to remain at a higher level of over $100, until such time that the world overproduces oil, which is bound to happen when prices are attractive, starting a new cycle of low oil prices.

For us who lived through the old cold war, it is easy to see the current Russian/Ukrainian crisis as a defining start of a new cold war of competing political, economic, and military interests between the West and China/Russia/Iran.

Globalisation which has been the model and theme of world development over the past 30 years is likely to falter, with global bodies like the UN, World Bank and IMF being less effective.