Price shocks have a global impact, especially on poor households. If the conflict escalates, the associated economic losses will be even more damaging
Rising oil prices are transmitted through price input effects and income transfer effects to raise inflation levels, which in turn inhibits investment and consumption. Photo/ Caijing reporter Jin Yan
Text | Caijing special correspondent Jin Yan sent from Washington
Edit | Su Qi
On March 8, local time, the White House issued a statement on its website, saying that US President Biden officially signed an executive order prohibiting the United States from importing energy from Russia. The executive order includes: prohibiting the import of Russian crude oil and certain petroleum products, liquefied natural gas and coal and coal products; prohibiting new U.S. investment in Russia's energy sector; prohibiting Americans from funding or supporting investment in energy companies in Russia. The ban took effect immediately, and White House officials said the existing contract would have a 45-day closing period.
Last year, the United States imported nearly 700,000 barrels of crude oil and refined petroleum products from Russia every day, far less than Europe imported 4.5 million barrels of oil from Russia every day.
On March 8, local time, the United Kingdom announced that it plans to stop importing Russian oil and corresponding petroleum products before the end of 2022 to further strengthen sanctions against Russia. Britain is expected to gradually adjust its oil purchases from the Us and the Middle East. Commerce Secretary Corvten said there was "more than enough time" for businesses and supply chains to adjust. He urged businesses to "use the rest of the year to ensure a smooth transition so that consumers don't suffer.". Currently, Russian oil imports account for 8% of UK demand.
Biden said he will continue his efforts to ease the pressure on U.S. households due to rising energy prices and reduce the U.S. dependence on foreign oil and fossil fuels. The U.S. government has pledged to release more than 90 million barrels of the Strategic Petroleum Reserve this fiscal year. The U.S. government is also in dialogue with a range of further steps that energy producers and consumers can take to ensure a stable global energy supply.
Andy Hecht, a veteran U.S. commodity investor, told Caijing that while high oil prices and inflation plague the U.S. economy, the U.S. has no choice but to ban Russian energy.
Gasoline prices have risen 51% year-over-year, with an average price of $2.77/gallon in the same period last year. The average price of regular gasoline has soared 55 cents over the past week to $4.17 a gallon as of March 8, setting a record for non-inflation-adjusted nominal prices, according to data released by the American Automobile Association (AAA). The data broke the record of $4.11/gallon set in the summer of 2008, when the United States was in the midst of a severe recession triggered by the housing crash.
U.S. consumers will soon be unable to afford the high price of oil. The popular folk joke is: drink more alcohol, cheaper than oil. Photo/ Caijing reporter Jin Yan
The head of ConocoPhillips pointed out that oil prices have now reached a point where consumers can accept it, and people are beginning to save energy and change their consumption behavior. If the war continues for months, existing plans will certainly not be able to cope. Ensuring affordable oil prices for consumers requires an adequate supply of oil. If companies decide to produce more oil, it will take 8 to 12 months to see the "first drop of new oil", which is why the medium and long term must be considered.
U.S. companies have also slashed the scale of energy imports from Russia in recent days. New U.S. sanctions against Russia could affect about 5 million barrels of crude oil supplies per day, including pipelines and sea freight. A number of energy experts pointed out to the "Finance" reporter that the United States has more room to maneuver, and Europe's choice is stretched, at least in the short term to pay more costs for oil, gas and other energy sources.
Robin Mills, chief executive of Qamar Energy, a Consultancy based in Dubai, told Caijing that the Crisis in Ukraine has changed Europe's overall plans for an energy future. The first oil crisis, the oil embargo from October 1973 to March 1974, reduced world production by 7 percent and had a huge impact on the world economy and energy system. Today Russia accounts for 25% of the world's natural gas exports, 18% of coal and 11%-13% of oil. Even if only some countries have issued energy bans on Russia, they will completely reshape the global energy picture that has embarked on the road to emission reduction.
Daniel Yergin, a well-known energy expert and vice chairman of Essence Huamai, recently said that the Conflict between Russia and Ukraine may lead to a crisis in supply, logistics and payments, and the scale of the crisis may be comparable to the oil crisis in the 1970s.
Sanctions game
As soon as the ban came out, European and American crude oil futures rose sharply, approaching the all-time high set in July 2008. On March 8, the New York Mercantile Exchange West Texas Light Oil 2022 futures settlement price of $123.7 per barrel, the highest settlement price since August 2, 2008, up $4.30, or 3.6%, from the previous session. Trading range $117.07 -$129.44; London Intercontinental Exchange Brent Crude Oil May 2022 futures settlement price of $127.98 per barrel, the highest settlement price since July 22, 2008, up $4.77, or 3.9%, from the previous session, trading range of $121.31 -$133.15 / barrel.
Russian Deputy Prime Minister Alexander Novak has warned that an export ban on Russian oil could push oil prices to more than $300 a barrel, and he has threatened to cut off a major gas pipeline to Europe.
Russia is the largest supplier of natural gas and crude oil to the Eu, with about 40% of EU natural gas imports and about 30% of imported crude oil coming from Russia. Among them, the natural gas imported by Austria, Italy and Slovakia from Russia is mainly transported through Ukraine, and some natural gas from Germany and Poland is also transported through Ukraine. The European Union said it plans to reduce Russian gas imports by two-thirds by the end of this year.
Europe has been plagued by rising energy prices in recent months, with the recent supply uncertainty caused by the situation in Ukraine further exacerbating Europe's energy woes. The Institute for European and Global Economic Research in Brussels reported that if Russia stops transporting natural gas, EU gas reserves will be cleared in March this year in the event of severe cold weather in Europe. European countries in the transition to energy are unlikely to find alternative supplies in the short term.
After the escalation of the Russian-Ukrainian conflict, the German government announced the suspension of the Nord Stream-2 project, which could have increased Russia's natural gas supply. The European Union has also imposed sanctions on Russia in recent days, including excluding some Russian banks from the Swift payment system, further increasing the uncertainty of Russia's energy supply to Europe. Within the SWIFT system, Russian banks rank second in terms of transaction size, 80% of which are conducted through the US dollar, in view of Russia's position in the trade in commodities such as oil and gas, kicking some Russian banks out of the SWIFT system, some experts are worried that it will hurt the dollar liquidity.
Joseph LaVorgna, chief economist for the Americas at Natixis, said in a note to clients: "The risk of policy mistakes is rising rapidly, and therefore the risk of a U.S. recession is rising rapidly." ”
The prospect of tight global supply has pushed up oil prices further, continuing the months-long rally triggered by the geopolitical crisis. The International Monetary Fund (IMF) issued a statement on the 5th, saying that although the current situation in Ukraine is still changing rapidly and the future prospects are full of great uncertainty, the economic consequences have been very serious. Soaring prices of energy and commodities, including cereals such as wheat, have further exacerbated inflationary pressures stemming from supply chain disruptions and post-COVID-19 recovery. Price shocks have a global impact, especially on poor households. If the conflict escalates, the associated economic losses will be even more damaging. At the same time, sanctions against Russia will have a significant impact on the global economy and financial markets, as well as a significant spillover effect on other countries. The statement noted that the Crisis in Ukraine has had a negative impact on inflation and economic activity in many countries.
Diane Swonk, chief economist at Grant Thornton, said that according to an expectation, if gasoline prices remain above $4/gallon for most of 2022, households will spend $850 more this year than they averaged last year — a $940 increase in gasoline costs last year compared to 2020.
As the West presses forward, Russia announced that it will restrict trade in some goods and raw materials in response to sanctions, and the specific list will be published in the near future. According to the relevant documents, Russian President Vladimir Putin signed the order to ban or restrict trade in goods, but said the specific list still needs to be determined by the cabinet. The Kremlin instructed the government to prepare a list of applicable countries within two days. Russia is a major exporter of oil, gas, cereals and metals. Exports of Russal, nickel and wheat accounted for 4.2%, 5.3% and 5% of global production, respectively. The order came as wheat, aluminum and palladium prices soared.
So far, in addition to restricting currency remittances, Russia's retaliatory sanctions have been vague, including the creation of a list of "unfriendly countries" and threats to cut off supplies to Europe's Nord Stream 1 gas pipeline.
Re-take sides
As many as 800,000 barrels of Crude Oil, Russia's flagship Urals, continue to flow into Europe through the Druzhba pipeline every day. The Soviet-era pipeline carries crude oil to Germany, Europe's largest economy, as well as refineries in Poland, Slovakia, Hungary and the Czech Republic. Analysts say these countries will face the greatest difficulties once a crude oil embargo is imposed on Russia.
According to media reports, a German government spokesman said that Germany opposes entering the next round of sanctions (against Russia). The spokesman said Russian oil would be difficult to replace in Europe and that Germany would consider various options for Russian oil. In addition, German Chancellor Schoelz said that Germany currently has no plans to stop Russian energy imports. As soon as the news came out, European stocks bottomed out and rebounded. European stocks recovered most of the losses, with the European Stoxx 50 turning higher after falling nearly 5 percent, the German DAX narrowing to 0.68 percent and the French CAC40 narrowing to 0.36 percent.
With the same considerations in mind, Bulgaria has also indicated that it will not join the sanctions. Bulgaria is very dependent on Russian energy. Bulgaria's gas supply is almost entirely dependent on Russian exports, and the only refinery in its territory belongs to Russoil, where 60 percent of the country's fuel oil is supplied.
Turkey relies on Russia for 45% of its gas needs, 17% of its oil and 40% of its gasoline. Officials from Turkey's energy ministry said on March 8 that Turkey will continue to buy Russian oil and hopes to lift sanctions on Iran, thereby increasing supply to meet global demand.
Nigel Green, founder and CEO of financial services giant DeVere Group, told Caijing that the market is fluctuating up and down as investors weigh the tragedy and its effects of the war in Ukraine. The intensified turmoil triggered by huge geopolitical events with far-reaching implications means that investors should now diversify as much as possible more than ever to maximize returns relative to risk.
OPEC Secretary-General Mohammed Barkindo also warned on March 7 that OPEC could not offset the impact of Russia's oil ban by increasing production. Bargendo downplayed OPEC's ability to boost oil production to offset the impact of Russia's oil ban. "We can't control the current events, the geopolitics, and that's determining the pace of the market," he said. ”
OPEC+ set a target last year to increase production by 400,000 barrels per day month by month from August 2021. At the OPEC+ meeting on March 2, 2022, this increase was sustained because the current high oil prices are mainly due to geopolitics rather than real fundamental support. Shale gas production in the United States has been restrained. Even if the number of wells drilled increases, it will take 6 months to achieve an increase in production. As spare capacity declines, further use of the oil strategic reserve will unnervious investors.
But in any case, after the Russian-Ukrainian conflict, Russian oil and gas may be squeezed out of the market to a certain extent. For the newly emerging space, Mills pointed out to the "Finance" reporter that this is a huge export opportunity for Qatar, the United Arab Emirates and other countries. On March 8, local time, Qatari national oil producer Qatar Energy announced an increase in the official crude oil price exported to all regions of the world in April this year, of which the offshore crude oil price is a premium of $3.9 per barrel compared to the Dubai/Oman benchmark quotation, and the onshore crude oil price is $4.75 per barrel premium to the Dubai/Oman benchmark quotation, which is $1.77 and $2.10 per barrel respectively compared with the March price.
The United States began to explore the restoration of friendly relations with Venezuela, once the largest oil supplier to the United States, and the two countries held their first high-level meeting since the severance of diplomatic relations in 2019 to find an alternative oil supply to Russia.
Alberta's energy minister said alberta, Canada's major oil-producing region, could help alleviate the global oil supply crisis caused by energy disruptions. "We are the solution, not Venezuela and other countries," the official said. ”