Skip to main content

Energy prices continued their upward momentum as the United States warned that Russia, one of the world’s biggest oil and gas producers and pipeline operators, could invade Ukraine at any moment.

On Monday, Brent crude rose as much as 1.8 per cent, taking the price to more than US$96 a barrel, setting a new seven-year high. The rise for the international oil benchmark came on top of a 4.7-per-cent gain on Friday, when geopolitical tensions over Ukraine intensified.

Brent finished at close to US$95, up more than 51 per cent in a year. The price increases came after Jake Sullivan, the U.S. national security adviser, said on Sunday an attack by Russia could begin “any day now,” perhaps even before the Winter Olympics end.

Economists fear that the relentless increase in energy prices since late last year will keep stoking inflation, creating a consumer crisis and potentially choking off the European recovery.

Equity prices in Europe fell as energy prices climbed. In London, the FTSE 100 index finished down 2 per cent while Germany’s DAX 30 lost 2.3 per cent and France’s CAC 40 fell 2.8 per cent. The European markets had fallen further earlier in the day, but recovered somewhat after Russian Foreign Minister Sergey Lavrov said that diplomatic efforts with the West should continue.

Some economists and strategists think oil could breach US$100 a barrel and go even higher if Russia, which has amassed 130,000 troops on the Ukrainian frontiers, does invade. Economists point out there is a strong relationship between sharply rising energy prices and falling economic growth.

British economist George Magnus said in a tweet that the “association is strong” between the two. The recession of 2008 and 2009 was preceded by oil prices that went to almost US$150; the recession sent them plummeting to US$40.

The oil price is particularly sensitive because of generally low inventories. European gas storage facilities are only about 35 per cent full, below the seasonal average, according to commodities research firm ICIS.

Gary Ross, of New York’s Black Gold Investors, wrote that “$100 oil is justified based on inventory and spare capacity. … Now possible reduction in Russian oil/gas exports sets up a stacked deck for higher prices.”

Even before the recent price rises, Europe was suffering from an expensive energy crunch.

The crunch was triggered by several factors: the recovery from the pandemic’s economic trough; lower than usual investment in oil and gas development; Germany’s decision to close all of its nuclear generating plants; the gradual phase-out of coal generating plants across Europe to meet net-zero emissions commitments by 2050; and the inability of renewable energy to take up the slack as energy demand rises.

Coal has also been rising and prices for natural gas, used for heating and electricity generation, keep reaching record levels. Last week, the price for gas on the Dutch gas trading platform, the benchmark for European wholesale prices, was US$26 per million British thermal units (BTUs). A year earlier, it was just US$7.

The International Energy Agency has accused Russia, which supplies about a third of Europe’s imported gas and more than half of Germany’s, of withholding extra supplies to Europe, and thereby jacking up prices. On Monday, gas and electricity prices jumped again, this time by more than 10 per cent.

Russia supplies gas to Europe through a network of pipelines that travel through Ukraine or directly to Germany via the Baltic Sea, as the Nord Stream 1 pipeline has been doing since 2011. The Nord Stream 2 pipeline, the twinning of the first pipeline, is completed but not yet inaugurated.

The United States has long opposed Nord Stream 2, arguing it would make Germany in particular, and Europe in general, overly reliant on Russian gas – allowing Russia to turn off the taps in a dispute or conflict. On Monday, Ukrainian President Volodymyr Zelensky accused Russia of using Nord Stream 2 as a “geopolitical weapon.”

Last week, U.S. President Joe Biden said Nord Stream 2 would never be commissioned if Russia were to invade Ukraine. But the new German chancellor, Olaf Scholz, has not specifically promised to kill the pipeline if Russia does invade, an indication of how reliant Germany has become on imported gas to power Europe’s largest economy.

Economists fear already high inflation rates will not come down as long as energy prices keep rising.

A Bloomberg economic model suggested a climb in crude oil prices to U$100 by the end of February from about US$70 at the end of 2021 would raise inflation by about half a percentage point in Europe and the United States in the second half of 2022.

“With inflation currently at multidecade highs and uncertainty surrounding the inflation outlook already unprecedented, the last thing the recovering global economy needs is another leg higher in energy prices,” HSBC economists Janet Henry and James Pomeroy wrote in a Feb. 4 report. “Yet that is what it is getting.”

Inflation in the euro zone will hit 4.8 per cent in the first quarter of this year, according to the newest forecast from the European Commission.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.