Weekly Brief: The Russia-Ukraine Conflict and Oil Prices

Brief History of the Conflict

An ongoing conflict that dates back to the Middle Ages, the clash between Russia and Ukraine is rooted in the border between the two nations, as well as the sovereignty of Ukraine. Just in the past few centuries, Ukraine was integrated into the Russian Empire, experienced a short time of independence, then into the Soviet Union, and finally declared independence in 1991, after the collapse of the Soviet Union.

Photo: https://www.ft.com/content/7202f007-d7b1-4830-a816-3b975d722761

What Caused the Recent Escalation in Tensions?

In the past few months, Russia stepped up their military exercises and deployed approximately 100,000 troops along with tanks and artillery to an area close to the Ukrainian border, conjuring fears of a potential physical conflict with Ukraine, as Russian President Vladamir Putin continues to prevent Ukraine from entering NATO.

Impact on European Oil Prices

Photo: https://www.themoscowtimes.com/2019/04/18/russia-bans-oil-coal-exports-to-ukraine-a65291

With around 35% of crude oil in Europe being supplied by Russia, experts say oil prices are likely to soar if the conflict escalates further, particularly if economic sanctions are placed on Russia’s exports or if energy resources are used as leverage.

As a contingency plan, the U.S. has initiated talks with energy companies to provide gas to Europe if needed.

As a result, Europe is likely to suffer an even higher rise in oil price compared to last year. In 2021, wholesale gas prices in Europe experienced a dramatic rise of more than 400%, the surge reaching a record high. This was caused by a number of factors, mainly the expectations of a cold winter, low inventory, and limited supply. Research firm Capital Economics found that compared to the five-year average, the inventory of gas in Europe was 21% lower as of January 12th, 2022.

European Natural Gas Prices in 2021:

Photo: https://www.ft.com/content/aa51e2fe-3da1-47cb-aa88-61f92e954e41

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References

Goncharenko, R. (2021, December 22). Russia and Ukraine: Chronicle of an undeclared war. DW.COM. https://www.dw.com/en/russia-and-ukraine-chronicle-of-an-undeclared-war/a-60214630

Tan, W. (2022, January 18). Russia-Ukraine crisis could spark a surge in Europe's gas prices, topping last year's highs. CNBC. https://www.cnbc.com/2022/01/18/russia-ukraine-crisis-could-spark-rise-in-europe-gas-prices.html

Taylor, C. (2022, January 5). Gas prices surge again in Europe, leaving some business owners 'terrified' for the future. CNBC. https://www.cnbc.com/2022/01/05/european-energy-prices-are-surging-creating-frightening-uncertainty.html

Zhdannikov, D., Bousso, R., Lewis, S., & Gardner, T. (2022, January 15). Exclusive: U.S. talks to energy firms on EU Gas Supply in case of Russia-Ukraine conflict. Reuters. https://www.reuters.com/business/energy/exclusive-us-talks-energy-firms-over-eu-gas-supply-case-russia-ukraine-conflict-2022-01-15/