Russia-Ukraine War’s Effects on the Oil and Gas Industry
- Russia's invasion of Ukraine has had rippling humanitarian and economic impacts across the globe, particularly on the energy industry.
- The imperative for oil and gas companies, working in concert with governments, is to mitigate the potential disruption of supplies from Russia.
- Over the longer term, the industry needs to strengthen its resilience and relevance in a fast-changing energy world.
July 05, 2022 | Oil and Gas 3 minutes read
Russia's invasion of Ukraine has had a deep human, economic and business impact. It has disrupted lives and livelihoods, as well as supply chains, industries and economies.
The energy industry, like all others, is now operating in an uncertain environment.
Oil prices were rising globally even prior to the full escalation of the war.
However, when Russia attacked Ukraine, the price of crude oil in the global market skyrocketed from around $76 per barrel at the start of January 2022 to over $110 per barrel on 4 March 2022.
The price of crude oil was already inflated even before the war due to higher demand fueled by the recovery of global economies from the COVID-19 pandemic and low investment in the oil and gas industry.
With the recovery of demand following the easing of pandemic restrictions, the imbalance between supply and demand was expected to grow to 2% in 2022.
EU’s Dependence on Russian Oil and Gas
Russia is one of the biggest producers of oil and natural gas. It also produced an average of 10.5 million barrels of liquid fuel products per day in 2020.
The invasion of Ukraine affected energy markets globally, particularly in Europe, which remains the main market for Russian oil and gas due to the lack of these energy sources in European countries.
Hence, by extension, Europe is also the main source of revenue for Russia, and the European Union acknowledges its dependency on the Russian hydrocarbon industry.
However, after Russia invaded Ukraine in February 2022, the U.S. government under President Biden signed an executive order banning imports of Russian oil, natural gas and coal on 8 March 2022.
The United Kingdom followed suit, announcing its intention to ban hydrocarbon products from Russia. 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.
The demand for hydrocarbons has increased as economies reopen and enter recovery phases.
Hydrocarbon output before the invasion of Ukraine by Russia was stagnant due to low demand and stalled economic activity as a result of the COVID-19 pandemic.
The war further affected this output due to the economic sanctions and foreign policy directives issued by Western countries. The current situation illustrates another important factor affecting the prices of oil and gas: international relations and geopolitics, as well as the foreign policies 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, including exchanges in Germany and France, the FTSE 100 in London and the Dow Jones and S&P 500 in the U.S.
Several leaders of the European Union have rejected the idea of banning Russian hydrocarbon imports. German Chancellor Olaf Scholz said that the EU deliberately exempted the hydrocarbon industry of Russia from sanctions. Prime Minister of the Netherlands Mark Rutte admitted that his country remains dependent on Russia for energy.
How Different Countries Are Coping With The Impacts of Russia’s War
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 were releasing 60 million barrels of oil, equivalent to 12 days of Russian exports, in the global market from their strategic reserves. The United States is also tapping its strategic reserves to alleviate rising gasoline prices. Other strategies include pressing oil and gas producers to increase their production output to meet the global demand.
Countries that are dependent on Russian hydrocarbon imports have also explored sourcing from other countries. The situation has also prompted them to reexamine their energy security policies and their respective energy mixes.
Going forward, countries will be trying to figure out how they can break their dependency on Russian energy while mitigating the impacts to their economies of doing so.
Sources and references:
https://timesofindia.indiatimes.com/india/data/russia-ukraine-history
https://www.nato.int/cps/en/natohq/topics_192648.htm
https://www.bbc.com/news/world-europe-60125659
https://www.indiatoday.in/diu/story/russia-ukraine-war-affect-india-platter-1931079-2022-03-29
https://www.nytimes.com/2022/02/23/business/economy/russia-ukraine-global-us-economy.html
https://www.eeas.europa.eu/eeas/war-ukraine-and-its-implications-eu_en
