President Vladimir Putin’s invasion of Russia’s western neighbour could well slam the brakes on the post-pandemic economic recovery. A surge in the oil price to more than $100 a barrel signals supply shock fears. Higher energy prices will squeeze household incomes and stoke inflation, accentuating central banks’ dilemma over interest rates.
News of the invasion pushed prices up 8 per cent on Thursday. Russia is Europe’s most important supplier of natural gas and the world’s third-largest oil producer, producing 10mn barrels daily.
Commodity traders had already responded to the rising tensions of recent weeks. Other than European natural gas futures, Brent has been the fastest rising commodity this year, up 35 per cent to more than $105. Worse, oil has quintupled in just two years. That is much faster than anything economies have experienced in more than 30 years, including the two Gulf wars.
All that will translate into pocketbook pain for households in the US, globally the largest consumer. The impact of surging oil prices is swiftly passed on to US consumers, as — relative to Europe and Japan — it is lightly taxed at the pump. Already the cost of filling up is approaching 2014 levels, at more than $3 a gallon on average. High prices then caused gasoline demand to falter.
Another flashing amber light comes from the metric of oil consumption as a proportion of GDP. Since the Opec oil shocks of the 1970s, any increase in this percentage to much over 4 per cent has signalled problems ahead. Assume that economic growth this year tapers down to low single digits and at today’s Brent price that figure will be roughly there.
It is possible that oil supply could surprise. US shale drillers could potentially increase output by 2mn barrels a day or more by 2024, according to Rystad Energy. Saudi Arabia could pump more. Iran’s return to the oil markets is also a possibility, say traders.
But the options are limited, given the investment squeeze by big producers in recent years. Europe’s dependence upon Russia’s natural gas is a serious worry. The fossil fuel provides a fifth of the EU’s energy needs, most of that from Russia. Europe is thus at the front line, in more ways than one. Putin’s invasion threatens Europe’s economies.
Source: Economy - ft.com
