War in Ukraine Expected to Trigger Higher Fuel Prices

As Russia moves troops into the Donbas region of Ukraine, experts warn that the prospect of a shooting war erupting in Europe, combined with heavy sanctions on Russia, is likely to cause instability in the energy market, possibly translating into significantly higher costs for both gasoline and natural gas. 

 

Because Russia is one of the world’s largest producers of oil and natural gas, disruptions in its output, whether as an unintended consequence of military action or as a response to international sanctions, can have a profound effect on energy prices. 

 

Global oil prices are extremely sensitive to supply disruptions, said Ed Hirs, an energy fellow at the University of Houston. 

 

“Russia exports about four and a half million barrels (of oil) a day, in a global market that’s roughly 100 million barrels a day,” Hirs told VOA. “If a million barrels gets pushed aside, either for the war effort or because sanctions cut off delivery, or there’s a catastrophe with the Russian oil fields as the war progresses … we’d expect to see the oil prices increase by 20% to 25%. That would mean the retail price of gasoline would go up 50 cents to 75 cents a gallon.” 

 

Sanctions levied on Russia 

As tensions have increased in Ukraine over the past few months, oil prices, in particular, have responded to widespread uncertainty by rising sharply. On Tuesday, the price of Brent Crude, which is commonly used as a benchmark, was above $96 per barrel, up from under $70 in early December. 

 

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

The one exception was the announcement by German Chancellor Olaf Scholz that the German government would not allow the controversial Nord Stream 2 pipeline, which would transport natural gas directly from Russia to Germany under the Baltic Sea, to open.  

 

As the pipeline has never been operational, that announcement had no effect on current energy supplies. However, a senior administration official Tuesday hailed the decision to suspend the approval of the pipeline as an important step in breaking Europe’s dependence on Russia for natural gas, and said that the U.S. would continue to ramp up shipments of liquefied natural gas to Europe to compensate for any loss of supply from Russia. 

 

Biden addresses fuel prices 

In announcing the U.S. sanctions targeting Russia, President Joe Biden on Tuesday warned that they would have consequences for Americans in the form of higher fuel prices. “Defending freedom will have a cost for us, as well, here at home,” he said. “We need to be honest about that.” 

 

He said that his administration would “take robust action to make sure the pain of our sanctions is targeted at the Russian economy, not ours.” He promised to lead a coordinated effort involving major oil producers that would “blunt” the impact of supply disruptions on fuel prices.  

 

“I want to limit the pain the American people are feeling at the gas pump,” he said. “This is critical to me.” 

 

Markets already stressed 

As a result of the coronavirus pandemic, energy markets were already significantly disordered, even before Russia began massing troops on the border of Ukraine last year. 

In the early phases of the pandemic, global demand for oil and gas plummeted as lockdowns kept people from driving and using public transportation. At one point in April 2020, there was such a supply glut that the price of oil plunged into negative territory, meaning that producers were having to pay buyers to take supply off their hands. 

 

One consequence was a major decrease in production, as many high-cost extraction operations became economically unsustainable and were taken offline. 

 

Demand has largely recovered, according to Gregory Upton, an associate research professor at Louisiana State University’s Center for Energy Studies. However, Upton told VOA, oil production remains slightly below pre-pandemic levels, which has added upward pressure on prices. 

 

Markets will compensate 

Upton told VOA that if supplies of Russian oil and gas are significantly curtailed as a result of war in Ukraine, that would encourage oil producers to reactivate some of the production facilities that were shut down during the pandemic. 

 

“If sanctions are put on Russian oil and/or natural gas, and that reduces that supply to the global market, that will put upward pressure on prices,” Upton said. “Markets will respond. Upward pressure on prices will incentivize people to go drill more wells … and it will move that market back into equilibrium.” 

 

That doesn’t mean that there will not be disruptions, some potentially significant, in the near term. But, as of Tuesday, Upton said futures markets continued to predict that, in the medium term, oil prices will fall. 

 

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