What an eventful week we have just completed? We just saw the wildest behaviour of global oil markets in recent history. World crude oil prices, were tossing up and down just like they were in a roller coaster ride. While oil consumers were in long queues at filling stations, oil consumers in UK and USA were complaining about extremely high petroleum prices that hurt their domestic economies so much.
Therefore, oil and energy supply became the most discussed and widely commented topic this week both in the local and international context. There were many questions. How to bear extremely high energy bills? What will be the future of oil prices under current conditions? Will it pass the mark of US$ 150? Is there a massive economic crisis at our doorstep? Ultimately what will happen to us? Those questions and uncertainties are hovering in minds of Sri Lankans and global citizens.
Bumpy ride of Brent
According to international market data, fluctuation of the global oil prices reported in the past week was the wildest movement or the highest ever trading range since the Brent benchmark was launched in 1988. Let us consider some highlights of those record-breaking twists of the crude oil trade.
The week began with “Shocking Monday” as crude oil prices reached almost US$ 140 mark, ($139.13) the highest since 2008, the US economic crisis era 14 years ago. (At that time crude oil prices reached the US$ 147 mark, establishing a record as the highest oil price in recent history). Later in the day crude oil prices settled within the range of US$ 124 and dropped further at the end of the day following an intervention by Germany announcing that it would not join the US move in the near future.
Then last Tuesday crude oil prices were in an upward trend following US President Joe Biden announcing that America unilaterally bans Russian oil imports in a move to deal another blow to Russian President Vladimir Putin and the economy of his country. However, President Biden did not unveil a specific plan on how to fill the vacuum of 10 percent of its total oil imports without Russian oil.
On “calming Wednesday” the world received brief relief as oil prices dropped by 12 percent following an intervention by the United Arab Emirates, a key oil producer and an influential OPEC member, as the Arab nation promised to persuade fellow OPEC members to change the current oil production output levels. However, oil prices were hovering around the US $ 110 mark.
Again, on Thursday we saw another rallying session of Brent crude oil as it reached the US$ 116 mark. The instability in the world market followed mainly due to the backtracking of UAE on its OPEC intervention effort pledged on Wednesday.
Then on Friday the last trading day of the week oil prices initially experienced some losses while hovering around the US$ 108-110 mark.
During the last record-breaking week crude oil prices fluctuated within the price margin of US$ 33.
Reasons behind the oil chaos
The war in Ukraine is considered to be the main reason for the panic in the global energy market. However, even before President Putin mobilised his war machine against his pro-Western, NATO friendly neighbour Ukraine, the world was at the first stage of a global energy crisis.
If we go back and analyse the global energy market data during the 3rd and 4th quarters of last year (2021), we could observe a major price hike of oil, gas and coal during the pre-winter heat generating energy shopping season of the northern hemisphere countries.
However, the rise of the Omicron variant of Covid- 19 pandemic cooled the heated energy market for a short period and therefore many countries escaped a major economic crisis at the end of the year 2021.
The leading reason for the current energy crisis which commenced last year was the discrepancies of production, supply and demand factors in the global energy market.
During the Covid-19 pandemic in 2020 and early 2021, demand for energy sources such as oil gas and coal slumped as a result of a drastic drop in demand due to nationwide lockdowns and production chains, triggering a lackluster economic condition in both developed and developing countries.
Lower oil prices hurt the economies of world leading oil producers, prompting low oil production levels declared by OPEC+ nations. At the end of the second quarter of 2021 many countries eased their Covid-19 restrictions and allowed the staggering economies to move forward, following the culmination of the devastation by the Delta variant of the Corona virus that resulted in thousands perishing and crippled health sectors of many countries.
The kick-start of global economic activities was rapid and vibrant. Therefore the world energy market was not ready to embrace the new global economic atmosphere. A sudden demand for energy was witnessed in the global market and supply was not sufficient to cater to the rising demand. The result was a sudden spike of oil, gas and coal prices, marking the beginning of the 2021-2022 global energy crisis.
This situation was an enormous blessing for oil and gas producers as OPEC and + nations including Russia were cashing in on profits of billions of dollars, gradually recovering the losses inflicted during the Corona era. Omicron being less severe was a key factor in economic recovery plans being pushing forward
Bull in a China shop
As nations were recovering from the devastative economic conditions of the Covid-19 pandemic, Ukraine- Russia crisis became the “bull in the China shop” factor in the already volatile global energy market. Even before the war broke out, the Ukraine issue was “fanning the flames“ in the energy sector. Russia is the second largest crude oil producer and the largest natural gas supplier in the world. Ukraine is also a key energy producer that contributes oil, gas and coal productions globally.
Speculation of losing Russian and Ukrainian energy products created a chaos in the global energy markets. The main concern was losing Russian gas that accounts for 40 percent market share and oil which is almost 30 percent.
Speculation fueled by the crisis situation wreaked havoc in global energy markets, resulting in the wild behaviour of oil prices.
Punch the enemy while facing the risk of self-injuries
President Joe Biden banned Russian oil from the US domestic market saying it would be a major punishment for Moscow for their offensive against Ukraine. It was also a punishment for American citizens, as they pay the highest energy bills in recent history, while facing soaring food and housing prices.
Rising fuel and other costs pushed the annual inflation rate of America up to 7.5 percent, recording the biggest year on year leap since 1982. In the US domestic market gasoline prices surged by 38 percent over the past 12 months while grocery and food prices increased by 8.6 percent, marking the largest annual leap since 1981. US motorists now pay over four US dollars for a gallon of petrol. Before the current crisis the price was just over two US dollars. Similarly in the United Kingdom fuel prices are soaring, as a petrol litre costs 1.55 pounds and diesel liter costs 1.67 pounds as average price of a full tank of petrol has risen by up to 88 pounds while a diesel full tank costs over 92 pounds, and those prices are drastically hurting the general public in Great Britain with exceptionally high energy bills.
The large fuel consumer nations such as India are yet to bear the brunt of this, followed by other developing nations including Sri Lanka. Economists warn that this could be the beginning of a major global economic downturn. High energy prices create such volatile economic situations according to history. In 1973 the Gulf oil crisis triggered by the Yom Kippur war between Israelis and Palestinians oil crisis triggered by Iranian Islamic Revolution, in 1979, then in 1991 first gulf war oil crisis and in 2008 oil crisis followed by US economic crisis, resulted in major economic downturns.
Seeking oil from a worse enemy
The current crisis could change geo political attitudes too. World media reported that the United States of America is turning towards one of its worst foes in Latin America, to fill the gap of losing Russian oil. Believe it or not US officials are reportedly holding talks with the Nicolas Maduro Government in Venezuela, the 12th largest oil producer in the world, to persuade the leftist nation to send its crude oil to America. Ironically the USA was trying hard to overthrow the Maduro Government until very recently and slapped harsh sanctions on the leading oil producer in South America.
During the initial rounds of talks USA has reportedly agreed to ease some sanctions on Venezuela in order to facilitate oil shipments from the Latin American nation. USA is also pushing Saudi Arabia and other Gulf oil producing nations to open up their oil taps. However Europe with a very high dependence on Russian oil and gas would not be in a position to quickly close taps like USA did. The European Union has adopted a long-term plan to pace out Russian oil and gas gradually.
What will happen next?
Rising oil prices will also take gas and coal prices up along with it. Currently prices of all energy sources are rising. World wheat market and sunflower oil market are volatile as a result of the ongoing war. Russia and Ukraine together produce 28 percent of global wheat output and 70 percent of global sunflower oil output, prompting those two commodities into a sharp price hike. That situation could disrupt our bread basket.
Russia is a key producer of agro chemicals. Sanctions on Russia would hurt the global fertiliser production very badly, as it is already battered by the oil crisis prompting skyrocketing Urea prices. Therefore, the agricultural sector could be affected very badly. Gold prices have increased by 18 percent this year so far with a record price of US$ 2050 per ounce signaling early signs of a global recession. Therefore small economies like Sri Lanka have to be prepared to face the upcoming storm