Ask the Expert: The Russia-Ukraine war’s impact on energy markets
Feb 20, 2023
When Russia invaded Ukraine in February 2022, the impact was felt across the world. In addition to the devastation Russian armies inflicted on Ukraine, the invasion affected global energy markets.
Michael De Groot.Michael De Groot, assistant professor in the Indiana University Hamilton Lugar School of Global and International Studies, answered questions about the war’s ongoing economic impact.
Question: What effect did the Russian invasion of Ukraine have on the U.S economy?
Answer: We’ve seen the Russian invasion of Ukraine had a tremendous impact on the energy market. It caused a spike in energy prices. So even though the fighting is happening thousands of miles away, Americans still feel the impact of it economically in their pocketbook as they try to fill up their gas tanks.
The reason this invasion had such an impact on oil markets is because Russia is a major oil producer, as well as a major natural gas producer. And oil and natural gas markets, by their very nature, are very speculative. Fears that traders had of a global shortage caused oil prices to skyrocket, particularly in the first half of 2022.
Q: What impact do the sanctions that the U.S. and other countries have placed on Russia have on the oil market?
A: There are a variety of sanctions that industrial democracies placed on Russia in the aftermath of the invasion; some are financial, others are export controls. The export controls are oriented not so much at controlling Russian production now, but restricting the ability of Russian oil and natural gas producers to move into the next generation of energy production. The European Union, as well as the United States and some other Western partners, have imposed outright bans on the import of some Russian energy.
In December, some of the G7 countries, as well as some of the other industrial democracies, placed a cap on the cost at which they would be willing to buy Russian oil at $60 per barrel. And that would not just impact oil coming into the industrial democracies, but it would also have a global impact because so much of the oil market is insured by Western financial companies. Where exactly this is going to lead, I think nobody quite knows.
Q: One year after Russia invaded Ukraine, what are you watching for in 2023?
A: In 2023 I think there are three things we should be watching: 1. How will Russian energy impact global markets? 2. How will fears of a U.S. recession, as well as climbing interest rates, impact energy markets? And then, finally, what’s going to happen with China?
Despite oil prices skyrocketing to levels we haven’t really seen since 2008, they began to come back down in the second half of 2022. And there are a number of reasons for this, most of which had nothing to do with the Russian invasion of Ukraine.
Prices dropped amid the slowdown of Chinese economic growth. China is the second-largest consumer of oil and, as they continue to deal with COVID-19 issues, demand slowed there. At the same time, there were fears of a U.S. recession as interest rates went up.
Q: Have the economic effects of the war revealed any vulnerabilities for the U.S.?
A: I think that we need to recognize that American energy independence is impossible. There is a gap between American production and American consumption, so the United States has to import oil. And, even in cases where the U.S. has been a net exporter, it still relies to a tremendous degree on conditions in global oil markets.
This is true for a couple reasons. It’s often cheaper to supply the coasts with imports rather than domestic production. Oil comes in different forms when it comes out of the ground; it can be sweet or sour, it can be heavy or light. And it can often be more cost effective to import from abroad rather than rely on domestic production. Conditions in global oil markets necessarily impact prices in the U.S.