Dearer oil

Oil prices hit their highest levels since the 2008 global financial crisis, mostly due to tensions over possible supply shortages caused by expanding sanctions on Russia, the world’s third-largest oil producer and second-largest exporter. It is also the second-largest natural gas producer and largest exporter of the commodity. The sanctions imposed after Russia invaded Ukraine initially excluded oil and gas due to their potential for upturning global energy supplies. However, increasing violence in Ukraine led the US and a few other western leaders to approve harsher sanctions also covering oil and gas. Moscow is also threatening to cut gas supplies to countries that boycott Russian oil.

Although prices cooled slightly since their midday peak of $139 on Monday, there are still concerns they could rise further as a result of more sanctions. Germany and the Netherlands are major holdouts, as among the most dependent on Russian fuel. The EU gets about 40% of its gas and 30% of its oil from Russia, and no quick fix is available if supplies are disrupted due to further sanctions. It is also notable that Russian natural gas, mostly delivered using pipelines, is even harder to substitute as it would likely have to be shipped in as LNG and then regasified, which requires separate facilities and more time and money.

The Russian Deputy PM has said a “rejection of Russian oil would lead to catastrophic consequences for the global market”, claiming that prices could rise to $300 a barrel. However, a rise this significant is unlikely if only because western leaders should be able to convince OPEC to increase output to stabilise prices. In the interim, the US has already begun releasing oil from its strategic reserve. Some countries could also make short-term shifts from gas to coal, although this would undermine their climate change mitigation targets. But it must also be noted that while most developed economies will be able to weather the storm created by any spike in fuel prices, developing countries such as Pakistan would be ravaged if the price of fuel rises much higher.

Published in The Express Tribune, March 10^th, 2022.

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