Fuel prices to increase in case of war in Ukraine

Since Russia is one of the largest producers of oil and natural gas in the world, disruptions in its production, either as an intentional consequence of military action or in response to international sanctions, may have a profound effect on energy prices.

Global oil prices are extremely sensitive to supply cuts, says Ed Hirs, energy affairs researcher at Houston University.

Russia exports about four and a half million barrels of oil a day to a global market with approximately 100 million barrels a day”, Mr. Hirs said of the Voice of America.

“If a million barrels are set aside, whether for war efforts or because sanctions interrupt supply, or if a disaster occurs in the Russian oil fields as the war advances... we will expect oil prices to rise by 20 to 25 percent. This means that the retail price of gasoline will increase by 50 to 75 cents per galon (16-25 cents per litre)”.

Sanctions Set Against Russia

While tensions have increased in Ukraine over the past few months, oil prices, in particular, have responded to this intensified uncertainty by increasing significantly. On Tuesday, the price of crude oil was over $99 per barrel, up from under $70 per barrel in early December.

On Monday and Tuesday, political leaders in the United States and Europe began announcing a list of punitive measures being imposed against Russia. Most sanctions targeted Russian banks and oligarchs and were not a direct move against Russia's energy sector.

The exception constituted German Chancellor Olaf Scholz's announcement that the German government would not allow the opening of the Nord Stream 2 controversial gas pipeline, which would carry natural gas directly from Russia to Germany via the Baltic Sea.

Since the pipeline has never been functional, this announcement had no effect on current energy supplies. However, a senior administration official welcomed Tuesday's decision to suspend the gas pipeline's approval as an important step in breaking Europe's dependence on natural gas and said the United States would continue to increase the remittances of liquid natural gas to Europe to compensate for any loss of supply from Russia.

Biden Treats Fuel Prices

During the proclamation of US sanctions on Russia, President Joe Biden warned on Tuesday that they would have consequences for Americans in the form of higher fuel prices. The protection of freedom will have a cost to us as well, here in the country”, he said. We should be honest about this. ”

The president said his administration would take powerful action to ensure that the consequences of sanctions are felt in the Russian economy, not in our “. He promised he would lead a co-ordinated effort involving the leading oil producers that would be “sbutin” the impact of supply cuts on fuel prices.

“ “This is very important to me. ”

Already Stressed Markets

As a result of the coronary pandemic, energy markets had become sensitive, even before Russia began gathering troops at the Ukrainian border last year.

In the early stages of pandemic, global demand for oil and gas declined rapidly after the jams prevented people from moving by car and using public transportation. At one point in April 2020, there was such a surplus of the offer that the price of oil fell into negative territory, meaning that manufacturers had to pay buyers to remove the supply from their hands.

The result was a major drop in production, as many high - cost extraction operations became economically unstable and interrupted.

According to Gregory Upton, professor at the Centre for Energy Studies at Louisiana State University, the demand for fuel has already been restored. However, Mr. Upton told the Voice of America that oil production remains slightly below levels before pandemic, which has increased pressure to increase prices.

Markets to Balance

Professor Gregory Upton said that if oil and gas supplies from Russia were significantly limited as a result of the war in Ukraine, this would encourage oil producers to reactivate some of the production facilities that were closed during the pandemic.

“If sanctions on Russian oil and/or natural gas are imposed, and this reduces supply to the global market, this will exert pressure for price hikes,” said Mr. Upton. “The increased pressure on prices would spur companies to drill more wells... and that would turn the market into balance. ”

This does not mean there will be no interruption, some potentially important, in the short term. But, as of Tuesday, Mr. Upton said that markets continued to predict that, over the medium term, oil prices would fall. /voa