Explained: How Russia-Ukraine war could affect gas prices in US and Europe?

The Russia-Ukraine war has now raged for eight days, with Russian forces ramping up attacks in major cities. The standoff, which remained since 2014, expanded after Moscow deployed over 150,000 troops along the east Ukrainian borders.

On February 21, Russia escalated the crisis by formally recognising the independence of two breakaway regions of Ukraine and later on February 24, unleashed "unprovoked military" operations on Ukraine. The move prompted Western nations to impose sweeping measures on Russian banks, trade, and the oil and gas industry.

The all-out war and subsequent sanctions have affected global markets, especially fuel prices, which have skyrocketed. In addition, concerns over Russia's potential counteractions against the measures have also worried experts, who said that the international market is already observing an "energy price shock" as a result of supply-chain bottlenecks in the wake of the two-year-long COVID-19 pandemic.

How will Western sanctions against Russia impact fuel prices?

To begin with, Russia is the largest producer of natural gas and the third-largest producer of oil after the US and Saudi Arabia. Russia contributes 17% to the global gas supply annually. the country's 40% of annual revenue depends on natural gas exports.

The entire European continent survives on 70% gas exports from Russia, as per US data. In addition, Belarus, China, Kazakhstan, Japan, and other parts of Eurasia, Asia, and Oceania also depend on Russian gas. As per Bloomberg, the US, UK and European Union (EU) collectively spend more than $700 million per day on Russian oil and gas imports.

As per JP Morgan, a US-based investment banking company, the disruptions in oil flow since 2020 have doubled the oil prices in a year ($60 per barrel went up to $120). "An environment in which global supply chains are already stressed and in which there is already some degree of uncertainty as to the outlook,” said Gregory Daco, chief economist at EY-Parthenon, as quoted by Vox.

In addition, the suspension of operations license by Germany for the multi-billion dollar Nord Stream II gas pipeline will also pave way for a dent in the global gas market. “The concern is that Russia would somehow curb oil exports if they really feel backed into a corner,” said Patrick De Haan, head of petroleum analysis at GasBuddy, adding that "That’s certainly a nightmare situation".

How does Russia-Ukraine war impact fuel prices in US & Europe?

The US and Europe, currently, are already dealing with higher gas and energy prices due to supply chain disruptions stemming from the COVID-19 outbreak. Now, experts have flagged that due to the onset of stringent sanctions against Russia, the price could witness a manifold rise.

The average price of gas nationally is $3.54 a gallon, up significantly from $2.66 a year ago, according to AAA, a global gas price analyst. In turn, lack of supplies from Russia will also result in a global scramble to procure from alternate sources, adding to the transit costs, in turn, a further rise in oil and gas prices.

Higher oil prices will also weigh down the economic growth. The spiking energy prices are plaguing Europeans and Americans by crimping consumer spending. The elevated oil prices could also result in slow economic growth as people not just need fuel for transportation but to heat their homes, cook and more, according to analysts at Berenberg bank, as quoted by AP.

The analysis was seconded by Mark Wolfe, the executive director of the National Energy Assistance Director's Association. As per Rystad's expert predictions, regular gasoline price is currently 60% higher than what it was a year ago and if it stays elevated, it could contribute to climbing fuel prices in the US to $4 a gallon on average in the coming months. "That’s going to create a lot of anxiety with consumers, and our government hasn’t come up with a solution to help families with rising gasoline prices,” Wolfe said.

Sanctions don't target oil & gas specifically

US President Joe Biden has assured that he would do "anything" to protect Americans from a spike in gas prices, thus limiting the sanctions against Russia to economy and finance. "The west can’t afford energy sanctions given where oil and gas prices are," Amrita Sen from the UK consultancy Energy Aspects told the Financial Times.

The US officials too went out of their way to say that they are not seeking to block Russian energy shipments despite imposing crippling sanctions on the Russian financial system and its international trade.

With Russia continuing a colossal war on Ukraine, energy security has remained a cause of concern, especially in Europe as 40% of its gas supplies are met by Russia. Russia's state-owned gas supplier, Gazprom, in 2020 made 83% of its sales by just exporting gas to Europe.

However, with no sign of cessation of Russian aggression and a lack of substantial alternative to supplies, Russia, in the long run, may use European gas dependency on Moscow as leverage, which as per Energy Intelligence, is likely to keep the prices high through the years to come.

(Image: AP)