Shortly after Canada and other Western democracies announced sanctions against Russia, the world heard a chilling warning about the impact they would have – not just on Russia, but on the global economy.
The warning came from Russian Deputy Prime Minister Alexander Novak, and his focus was on the world price of oil.
“It is absolutely clear that a rejection of Russian oil would have catastrophic consequences for the global market,” Novak said in a televised statement.
“The price spike would be unpredictable,” he warned. “That would be $300 a barrel, if not more.”
Oil above $300 a barrel?
As the North American oil price fell back to around $100 this week, it was easy to scoff at the Russian official’s doomsday warning.
But while there are good reasons why oil prices above US$300 are not an option, the invasion of Ukraine has triggered a series of events that will lead to serious disruption in the global economy. – likely to affect Russia and Western democracies for a long time. after the bombs stopped falling in Ukraine.
There are two key elements to this disruption. One is so-called “demand destruction” – the decision to use fewer high-priced Russian-produced commodities. The other is a new global quest for greater supply chain security in a world that has proven to be more unstable than most of us realized just a few months ago.
As representatives of the OPEC oil cartel meet in Vienna on Thursday and peace talks in Turkey offer glimmers of hope that the murder of Ukrainian civilians in Vladimir Putin’s reckless war may end, the volatile price of oil has retreated again.
But even as Brent crude — the global price for oil used outside of North America — hit around US$130 a barrel, experienced oil market watchers like longtime oil geologist and energy analyst Art Berman said Novak’s prediction was laughable.
“A Russian official’s opinion on the price of oil is worth as much as Donald Trump’s opinion on the 2020 US election results,” Berman, who is based in Texas, quipped in a recent email conversation.
Industry caught with the pants down
Despite the trillions of dollars at stake, the oil market is complex and difficult to predict. In 2014, for example, despite a fortune spent on research, global industry was caught off guard as the North American price of oil plummeted from around US$100 a barrel to under US$30 in one year and a half.
That kind of uncertainty leaves an opening for people like Rory Johnston, the founder of Toronto-based Commodity Context, who writes about the global energy industry. Its latest report, released on Tuesday, is titled “Russia’s size hole in oil», of a world market shaken by a new oil shock.
Despite the recent decline, Johnston sees oil prices remaining high as major Western companies shun Russian oil and continue to cut shipments from Russian ports once existing contracts run out.
As UAE Energy Minister Suhail al-Mazrouei said ahead of the OPEC meeting, there is no easy way to replace the 10 million barrels per day that Russia contributes to global sourcing. Of course, all this offer does not disappear. There are still many buyers of Russian crude, including China and India – and there are now reports that some of this Russian oil is laundered and resold as if it came from somewhere else.
Canada is increasing production, but Johnston said progress is slow and any increase runs counter to the federal government’s plan on Tuesday to cut greenhouse gases from the oil and gas sector. Johnston says that while U.S. shale oil could be tapped faster, investors have gotten their fingers burned in the past when oil prices have fallen. They fear the same thing will happen again and have been reluctant to risk their money.
“All of us analysts are trying to think about the balance between global supply and demand, that’s where you get really, really high prices that cause some kind of demand destruction,” Johnston said during a talk. ‘a telephone interview. “Prices need to rise enough that people drive less, fly less and use less fuel overall.”
For Russia, which in 2019 depended on fossil fuels for 60% of its exports and 40% of government revenue, the destruction of demand will have a huge long-term effect on that country’s economy.
In search of a secure standard of living
The search for alternatives to Russian oil and gas could be part of a much larger economic and political split into trading blocs, sparked by the invasion of Ukraine, said economist Dane Rowlands of the Norman Paterson School of International Affairs from Carleton University in Ottawa.
It is clear that European countries – shocked to act when they realized how much Russian energy exports had on their economies – are looking for ways to move away from fossil fuels altogether for regional security reasons, even if it costs more. Inevitably, this can lead to a shrinkage of the entire global economy, at least in the short term.
“The change that people are considering right now is the trade-off between the standard of living itself and the security of that standard of living,” Rowlands said. “I don’t think the Europeans will want to be in a position where Russia dictates to them by threatening to withhold oil and gas.”
As supply chains collapsed in the wake of the global pandemic, some experts realized the security implications of losing access to goods critical to the North American economy. Russia’s invasion of Ukraine has brought it home with a vengeance, and Western governments, including Canada, are looking for ways to shorten supply lines and find sources of supply from of countries with trustworthy democracies, Rowlands said. This includes energy but also green technologies.
Replacing Russia’s energy will be the hardest part for the West, he said, but on the other side of that divide there are already indications that Russia, hit by economic sanctions , is running out of key Western imports which it must now try to produce for itself, which Rowlands says will be a much more difficult task.
“Obviously the amount of restructuring that needs to happen in Russia will be huge compared to what it will be in the West,” Rowlands said.