Ukraine crisis: What’s at stake for the global energy market and Singapore’s energy prices?

The current conflict between Russia and Ukraine has resulted in uncertainties and instabilities in the global oil and gas markets. Soon after Western nations imposed more sanctions on Russia, oil prices soared and the energy and commodity markets went into a state of chaos, as economies around the world grapple with the fear of a disruption to global energy supplies, driving up global energy prices.  

Dr David Broadstock, Head of the Energy Economics Division at the NUS Energy Studies Institute, explains how the Ukraine crisis will impact the global energy market as well as the people in Singapore.

Q: How will the Ukraine crisis lead to higher global energy costs?

A: The Ukraine crisis did not emerge suddenly, however the past week or so has seen it transition with a scale and pace that few would have predicted. Russia is a large and resource rich country. Around 40% of the natural gas consumed in Europe comes from Russia, and the nation also sits generally among the top three oil producers and exporters. What this means is that Russia is a significant component of the global energy supply chain for two fuels which between them make up for around 50% of primary energy consumption. The Ukraine crisis is placing pressure on these supply flows, either because of physical supply chain disruptions, tightening sanctions, or other trade restrictions – for example on 28 February, Canada announced a ban on the import of Russian oil.

The following mechanics become fairly simple at this stage. Assuming global demand for energy remains largely unchanged, we nonetheless have a reduction in supply. To satisfy the same level of energy consumption, countries will need to increase purchases from other countries than Russia. Assuming Russia was in the market because it was cheaper to purchase from them, when they are not in the market, means turning to other presumably higher priced producers – hence costs go up.

The above positions how the fundamental structure of prices will be subject to upward pressure, but it is important to also recognise that expectations do impact markets. Expectations become hard to forge at times like this, and such uncertainties are rarely priced as a discount, adding to the upward price pressure.

Q: How will this translate into higher petrol and electricity prices? Why is this so?

A: The impacts of the Ukraine crisis go beyond oil and gas prices, since oil and gas are intermediate inputs into the broader energy supply chain. Oil converts to gasoline, and gas is widely used in the production of electricity. This is especially true in Singapore, where around 95% of electric power generation is based on natural gas.

A rise in the price of oil therefore means that making gasoline (or diesel for that matter) is more expensive – and while Singapore is transitioning to clean energy vehicles, gasoline and diesel are still used pervasively. By the same logic, an increase in the price of natural gas makes the cost of producing electricity higher. There may be little room to navigate these increases in the short term.

Q: What other items could be directly impacted and see higher prices? Why is this so? 

A: The impact to prices of other items will be a mix of direct and indirect. The direct effects will come from the items which are exported by both Russia and Ukraine – Russia’s exports diminished by sanctions, Ukraine’s by the physical conflict and mass exodus of current and future labour. Ukraine is widely known as a major global exporter for agricultural commodities, and this will have an impact to global food supply chains, and prices.

Russia plays a significant role in fertiliser, and metals markets, in addition of course to oil and gas. Cumulatively, the crisis is having a direct influence to a number of the major commodity classes. History tells us that such impacts will spill-over to most commodities to some extent. Global markets are doing their best to absorb the short-term impacts. Yet durable impacts to global commodity supply chains will be consequential. The goods and services we consume are dependent on using these commodities in one way or another – meaning that indirect effects will likely be felt by most of us in the end.

Q: How soon will we experience the impact? 

A: What is hard to calibrate today is whether we are sitting in front of a contained conflict, or on the verge of something bigger. Signals are worryingly tracking in the direction of the latter. Due to this, we are witnessing an unprecedented level of sanctions, military posturing and political rhetoric that clearly will take time to calibrate. But, it has only been about a week since events began.

Today, for the average member of public, this is a recognised social inequity. Some economic impacts are already filtering through in terms of reports on higher gasoline prices in some jurisdictions, however the broader range of effects will take a little longer to appear. Supply chains typically operate in weeks or months, and it will be important to separate the impact of unavoidable short-term shocks from more manageable long-term market re-configuration. As such the next two months or so will become very revealing as to the trajectory of such durable impacts.

 Q: How long will the effects last? 

A: The crisis has years-long foundations, and has triggered economic sanctions which will have years-long consequences – there seems no ambiguity that these will endure beyond the cessation of hostilities. Given the complexity of Russia’s pretext for sending troops into Ukraine, and the deep disdain voiced by other nations towards the move, it would however be speculative to predict how long the effects will last: 1 year, 10 years, longer perhaps.

Prices will, of course. settle in the future, at least to the extent that markets are normally ‘settled’, but whether they will settle at or near to the same price levels we have seen in the past remains to be seen. Recognising that oil and gas markets are facing a shock today, we must also be mindful that while countries explore options for alternative oil and gas supply chains, they are at the same time committed to decarbonisation transitions. There is a forced opportunity to consider accelerated transitions, and the adoption of alternative energy sources/technologies in a more expedited time frame to ensure energy security and environmental sustainability without leading to compromise on economic competitiveness.

 Q: How should a member of the public and businesses brace themselves? 

A: For the average person, the reach of markets potentially impacted should be recognised. There is potential for core inflation, particularly in an important dependant country such as Singapore. Being frugal with spending is always a sensible basis for prudent financial planning.

Singapore has recently seen Goods & Services Tax (GST) increases, sustained fuel price increases, and now the looming economic consequences of the Ukraine crisis. This is uncomfortable, but also means that both households and business have had financial planning towards the front of their mind already.

At a broader economy-wide level of thinking, accelerating the energy transition will help shield the economy from sustained increases in oil and gas prices, as will other initiatives already underway or under review for importing low-carbon energy. Faster uptake of circular-economy principles and development of facilitating market mechanisms would help grow locally driven economic activity. Such bigger picture initiatives will not emerge overnight, but the sooner we make progress, the faster we gain the benefits, and the Ukraine crisis offers a compelling impetus for intensifying our efforts.