Macro Insights Weekly: Ukraine and energy price risks

The ongoing conflict in Ukraine has shone a harsh light on Europe’s disproportionate reliance on energy supply from Russia. Supply/demand dynamic is tight for a range of fossil fuels worldwide.
Taimur Baig, Ma Tieying28 Feb 2022
  • Oil and gas prices are high, but not close to record in nominal or real term
  • The world economy has some capacity to absorb rising oil and gas prices
  • Substantial additional oil supply is likely to come to the market this year
  • The situation with gas, especially in Europe is far more challenging
  • Such developments will fuel resolve toward green energy transition
Photo credit: AFP Photo

Commentary: Ukraine and energy price risks

The ongoing conflict in Ukraine has shone a harsh light on Europe’s disproportionate reliance on energy supply from Russia, along with the fairly tight supply/demand dynamic for a wide range of fossil fuels worldwide. These factors have combined to push up the price of energy products like crude oil, natural gas, heating oil, gasoline by 20-32% in the first two months of 2022, complicating an already challenging inflation picture. We lay down three considerations around this:

First, $100 oil may grab headlines, but it is by no means novel or a source of major stress for the global economy. Both in nominal and real terms, oil has been much higher in the past. Additionally, the price increase is taking place when consumer balance sheets are strong (from the perspective of household leverage), bolstered by rising wages and generous public sector transfers. Compared to past oil shocks, global energy intensity it relatively lower, which in turn lowers the sensitivity of global GDP with respect to energy prices. Oil would have to go up by at least 20% before we begin to worry about the global demand outlook in a meaningful manner.

Second, there is a lot of supply in the pipeline. The world may not be able to replace Russia’s massive exports (4-5mn barrels/day to China, EU, India, Japan, South Korea) entirely, but that is not at all on the table in any case. To the extent that the conflict creates some uncertainties about Russian oil supply, there is substantial alternative production in the pipeline. As and when the nuclear deal with Iran is revived, 1mn barrels/day could be coming to the market. US producers could also produce perhaps another million barrels this year.

The matter is more complicated with gas, given the difficulty of supplying it without pipelines. Europe imports 40% of its natural gas from Russia, underscoring its exposure and vulnerability. But with nomial and real price of gas in by no means close to record levels; hence we are not yet in major impact territory.

Finally, these near-term adverse developments are surely to fuel further resolve toward green energy transition and alternative energy sourcing (this may include revisting nuclear power). This is particularly the case for Europe, but Asia falls in this camp as well.

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Taimur Baig, Ph.D.

Chief Economist - Global

Ma Tieying 馬鐵英, CFA

Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣

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