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Tai Hui
Tai Hui

Macroscope | Higher energy prices over Ukraine invasion should worry Europe more than US

  • Europe and the UK rely on imports from Russia for a third of their gas, putting them at risk from disrupted deliveries amid fighting in Ukraine
  • The US should be more resilient given trends in household savings and less spending on energy

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Surplus gas is burnt off at the crude oil processing plant of PCK Raffinerie in Brandenburg, Germany on February 25. The German government says it will free up some of its national oil reserves in response to the conflict in Ukraine and rising oil prices. Photo: DPA
Tai Hui

One of the main economic impacts from the events in Ukraine is higher energy prices. Oil prices have risen to more than US$100 per barrel, the highest in a decade.

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High energy prices typically coincide with higher food prices because of increased fertiliser and transport costs. It can also translate into higher taxes on households, which could in turn hurt consumption. Yet the global economy can still avoid this troubling combination of high inflation and weak growth, although some regions could be more vulnerable.

The events in Ukraine could have some implications on the exports of oil, natural gas and other commodities. According to the International Energy Agency, Russia’s natural gas made up almost a third of European and British total consumption. Disruption of gas supplies to Europe could leave factories lacking the needed power to operate and households facing a surge in their heating bills.

04:01

How international sanctions imposed since Ukraine invasion are hitting Russia

How international sanctions imposed since Ukraine invasion are hitting Russia
While Europe would be the most affected directly, disruptions in oil supply in Europe could push global crude oil prices higher. Low oil inventory means there is a limited buffer to protect against a potential supply hit. There are few alternative sources of oil production that could be stepped up at short notice to offset reduced supply from Russia.

Opec has pledged to raise production per month by 400,000 barrels per day since last year, but the cartel has fallen short of this commitment for much of the second half of 2021. US investment in new oil rigs has been slow to pick up. With global demand improving on the back of economic reopening, any disruptions from Russia or elsewhere will send oil prices higher.

This suggests that the expected dip in inflation in the United States and Europe could be delayed. In the US, headline inflation would start to decline in the second quarter this year and reach 2.5 per cent to 3 per cent by year end if oil prices could stabilise at the US$80 level.
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However, with oil prices breaking above US$105 per barrel and rising, it could take longer for inflation to reach such levels. Along with a tight job market, US inflation could still be running at 3 per cent to 4 per cent for much of this year, above the Federal Reserve’s target of 2 per cent.

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