The price of oil topped $100 per barrel for the first time since 2014, and natural gas prices surged on Feb. 24, after Russia launched an invasion of Ukraine.
Russia, which is the world’s number-three oil and gas producer and supplies 40% of Europe’s gas, will likely face restrictions on its ability to produce and export fossil fuels as a result of sanctions on its banks and pipelines.
The oil price, already about $10 higher than it would be without the conflict, is likely to rise by another $10 this quarter as the situation escalates, JPMorgan analysts predict. Russia is such a dominant player in global energy markets that there’s no way to completely fill the gap it leaves behind.
Harsh sanctions on Russia will invariably lead to higher energy bills worldwide.
US president Joe Biden said on Feb. 22 that he wants “to limit the pain the American people are feeling at the gas pump,” but his options are limited even as US oil and gas producers step up drilling.
Officials may authorize the release of oil from the Strategic Petroleum Reserve, in coordination with the Organization of Petroleum Exporting Countries nations. But the SPR is already at its lowest level in 20 years, currently holding about as much oil as Russia produces in 50 days.
For Europe, gas is a bigger problem than oil. Although the end of winter will mean less demand, existing gas storage in Europe would be depleted in about six weeks if Russia’s supply is cut off completely, according to consultancy Wood Mackenzie.
It’s unlikely that European leaders would take such a step. In the meantime, as prices skyrocket, more shipments of liquified natural gas from the US are being diverted to Europe, and reached a record in January. But there’s not enough LNG to meet all of Europe’s energy needs, says Salih Yilmaz, senior oil analyst at Bloomberg Intelligence.
Yet other policymakers are claiming that climate policy in the US and Europe has left them at Russia’s mercy, and that more domestic drilling is the answer. With oil and gas prices at their current level, fossil fuel companies will have all hands on deck to increase production.