The price of Brent crude exceeded $112 a barrel this morning. There is, as yet, no interruption in supply from Russia, nor any ban on buying their oil (save for in Canada) – but western companies are reported to be exercising a voluntary boycott. Either that, or they are sceptical of whether their orders will actually arrive. Turkey has already closed the Bosporus Straits to warships. Much of the oil exported to Europe takes this route.
Even a voluntary refusal to buy Russian oil will have serious repercussions for markets. Russia produces around 12 per cent of the world’s oil – which is a huge chunk to lose. Except, that is, not everyone is refraining from buying it. One of the consequences of a western boycott of Russian oil could be to lower prices for China, India and Pakistan, which are served via pipelines through Kazakhstan. If the West refuses to buy from Russia, then Moscow is likely to decide to pump more of the stuff into Asia. Consequently, Middle Eastern oil – which would usually have gone to China – will probably be diverted to Europe.
The situation with oil is very different from that with gas. Given that Europe receives most of its oil by tanker, the infrastructure exists to switch suppliers to the Middle East or the US. But with gas, there are limited facilities with which to receive it by sea. Europe gets 40 per cent of its gas from Russia, received via pipeline. Rebuilding this infrastructure to avoid reliance on Russia would take time. All of this means that gas prices have the potential to spike much higher than oil prices. Were supplies from Russia to be cut off – and there is now a real prospect of that happening – it would cause serious disruption to the European economy. The only good news is that we are approaching the end of a mild winter, so demand can be expected to drop in the coming weeks.
The latest movements in oil prices are a reminder that it is, and always has been, a highly volatile commodity. A price of $112 per barrel may be high by the standards of recent years, but we are not yet at record levels. Brent crude hit $140 a barrel in 2008 and spiked again to $125 in 2012.
Reversals in the market tend to be very sharp; the last fall came a few months after Putin’s 2014 invasion of Ukraine. When Russia invaded Crimea, in February of that year, oil was sitting at more than $100 a barrel – but it ended the year at less than $50. It is likely that oil prices will now go on to reach new heights. Two things could prevent it: a global recession sparked by the Ukraine crisis or other oil-producing countries increasing their pumping in reaction to soaring prices. But, as we have seen in the past, overestimating demand can result in a glut – and a subsequent collapse in prices.
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