Vladimir Putin, the president of Russia has unleashed “World War III '' with Ukraine recently, claiming motives and ideas of the Ukrainian government will threaten the safety, development and existence of Russia. Other than the constant gunshots and terror in the warzones inside Ukraine territory, this war has exposed the over-reliance of Russian’s natural resources by European countries. While countries in Europe and North America quickly reacted by imposing sanctions to the Russian government and Russian products, problems arose when most energy sources in Europe came from Russia. With Russia being one of the biggest crude oil and natural gas providers and crude oil being one of the most essential raw materials in our daily lives, this severely increased the price of crude oil and led to a big hit on global stock markets.

What led to the outbreak of this Russo-Ukrainian war?

Russia and Ukraine had been in dispute in the past 14 years with local Ukrainian forces and pro-Russian separatist forces together with Russia having opposite views. Small scaled conflicts arose in the past 8 years since February 2014 where Russia is believed to have breached the borders of Ukraine and taken some of Ukraine's land in Crimea and Donbas. However, the conflicts escalated with Ukraine stating their desire to join the Western intergovernmental military alliance North Atlantic Alliance(NATO) and the European Union in 2022. Putin has criticised NATO as a threat to his country with the aim of splitting the society in Russia and therefore tried to ban Ukraine from ever joining the military alliance. This is how the war between Russia and Ukraine started on 24 February 2022.

How does Oil Prices get affected from the War?

Oil price chart

Figure 1: Oil prices in US dollars since 2008 (Bloomberg, 2022)

Russia has been the largest supplier of natural gas and metals in the world while being the second largest crude oil exporter as well. According to Figure 1, it is clearly shown that oil prices have skyrocketed in the past year, reaching the highest since the 2008 global financial crisis. This is mainly due to the disapproval of such actions from Putin by the western countries, imposing sanctions on the purchase of most Russian exported products, merchants, politicians and Russia related companies. President of the United States Joe Biden has already banned purchases of Russian oil and natural gas but the US can still survive with their local production and the purchase of Saudi, Canadian and Mexican oil which contributes to a total of 63.5% of America’s foreign oil purchases. For the United States, the import of Russian oil only takes up 3% of their net foreign oil exports which can be replaced with more local production. However, as the world’s biggest economy, such news fuels the rise in oil prices.

While the US government has urged European countries to impose the embargo on Russian energy, it has been reported that roughly 40% of natural gas and 25% of oil in Europe are supplied by Russia. In 2020, the EU has imported $105.4 billion worth of Russian goods – mainly crude oil, natural gas and metals. As the largest buyer of Russian energy, a sanction by the EU on Russian energy may be able to strongly affect the Russian economy with the Russian ruble at an all time low and interest rates of a record high of 20%. Hypothetically, if the EU are able to break all ties with Russia, they will lose 50% of the country’s GDP.

According to the German chancellor Olaf Scholz, Russian energy sanctions are “deliberately exempted” because its supply cannot be secured “any other way”. Prime Minister of the Netherlands Mark Rutte further added that they are too dependent on Russia oil and Russian gas. If European companies quit doing business with Russia, there will be enormous ramifications around Europe and the world. With the EU's over dependence on Russian oil, sources fear that Russia may “weaponise” their natural resources in response to Europe's sanctions and politicians are calling for a creation of an oil or gas reserve to protect consumers from oil price shocks.

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