Russia-Ukraine war: Its impact on the worldwide oil market

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY
UNIVERSITY OF ECONOMICS AND LAWS
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Russia-Ukraine war: Its impact
on the worldwide oil market
A Review of the Literature
Instructor: Dr. Truong Cong Bang
Class: K21408CA
Students' names:
Pham Nhu Man Khuong_K214081854
Ngo Thi Mai Linh_K214081856
Phan Thai Nhat_K214081861
Vo Ngoc Phuong Quynh_K214080603
Ho Nguyen Lan Tien_K214080606
Introduction
These days, the crisis between Russia and Ukraine, which attracts the world's
attention, is becoming increasingly complicated. When the former fired the first shot at the
other side, one of the first barometers of what the fallout might mean economically for the
rest of the world was registered by the oil market. The war has caused the petroleum market
to face continuous waves of crisis, particularly making the price of oil in most countries
throughout the world escalate.Dourian (2022) stresses that the oil market was tense and this
article’s prices were significantly on the ascent as oil costs moved to their most elevated level
in eight years. Because oil is believed to be the major energy source throughout the world and
acts as the lifeblood of industrialized nations, it is extremely necessary to take its variation
into account. Thus, this literature review aims to develop an understanding of the reasons why
as well as how the conflict between Russia and Ukraine influences the cost of oil around the
world.
Ho Chi Minh, March 26th 2022

Why does the Russia-Ukraine conflict influence oil market prices?
As the Russia-Ukraine war appeared, the United States and European Union
eliminated central Russian banks from the SWIFT - dominant financial system worldwide
that allows banks to carry out overseas transactions. According to Parsons (2022), most of the
payments involved in gas and oil exports are done through SWIFT. As a result of this
isolation, these banks may be unable to connect with foreign countries, affecting exports in
general and international oil trading in particular.
The major impact of the war on oil prices started as the United States imposed an
embargo on nearly all commodities, including oil from Russia. According to the White House
(2022), oil purchased from Russia accounted for only 8% of the total oil imports of the United
States in 2021, which means that the loss of supply from Russia will not affect the US too
much as it can find alternatives. However, with its position in the world, followed by its
announcement was the supportive response of over 30 countries in the world, announcing
sanctions that have a severe economic impact on Russia, which some countries like Canada,
Australia and the United Kingdom, whose oil imports from Russia were 960, 960 and 1567
thousand barrels per day, respectively, according to International Energy Agency (2022c).
Besides, the EU (which accounted for 60% of Russian imports in 2021) also plans to phase
out Russian oil, the Open Access Government (2022) stated. As these countries assert the
independence of Russian oil collectively, there is redundant oil that should be exported.
This means that these punishments made the amount of oil released to the global
market comparatively low. Consequently, according to the law of supply and demand, when
the supply is tight but the demand for oil remains at a steady rise during the post-pandemic
recovery, the price will increase.
There are two basic solutions that are believed to offset these disruptions. The first
one is that Russia is trying to redirect its export flows to new markets, and the second one is
that oil-involved companies can increase mining output and production. However, concerned
about the possible consequences in the future, new targeted customers as well as oil producers
tend to maintain the status quo rather than change their policies.
Russell (2022) said that Russia is trying to find and export its oil to other alternatives,
which Asia is considered a potential market. At first, remedies like offering special discounts
or providing these new customers with some of the concession policies, appear to alleviate the
situation. Nonetheless, no matter how attractive the offer is, the fear of Western pressure on
energy sanctions and freezing selective banking transactions on Russia can lead these
countries to beware of this venture, according to theInternational Energy Agency (2022b). As
Russell (2022)argues, Russia is trying to find and export its oil to other alternatives, which
Asia is considered a potential market. Initially, remedies such as offering special discounts or
providing these new customers with some of the concession policies, appear to alleviate the
situation. Nonetheless, no matter how attractive the offer is, the fear of Western pressure on
energy sanctions and freezing selective banking transactions on Russia can lead these
countries to beware of this venture, as theInternational Energy Agency (2022b) declares.
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Hirsh (2022)pointed out that the Organization of the Petroleum Exporting Countries
(OPEC) controls about 70% of total global crude oil and is looking to increase oil
exploitation. Because of the volatile market and the fact that the oil price fell during the
pandemic, they have become more cautious. As a result, they have decided against pumping
any more oil than their current quotas allow.
Impact on the oil market of Near-Russia countries
The conflict has sent oil prices higher and injected even more uncertainty into an
already off-balanced worldwide economy. It is clear that petroleum prices have been forced to
rise dramatically in a short period of time. In October 2021, as the world gradually adapted to
the pandemic, oil prices in the international market, in general, will have a significant change
but they reached an average price of 86 USD per barrel following The U.S. Energy
Information Administration (2017). However, in 2022, after the conflict between Russia and
Ukraine, the price per barrel of Brent crude oil - the most common measure of oil prices in
March, reached a record level of 150 USD per barrel as reported by International Energy
Agency (2022b), an increase of more than 10% or can even increase to 300 USD/barrel. The
increase in petroleum prices to dizzying levels and which reached a 14-year high, close to the
all-time record of 147.50 set in July 2008, was unprecedented.
The impact of the increase in gasoline prices has been reflected directly in the figures.
As stated by International Energy Agency (2022a), the dramatic spike in gasoline prices is
due to the fact that Europe contributes to 60% of Russia's oil exports. That is why the price of
petroleum in the European Union is fast rising. In particular, the cost in the United Kingdom
is significantly higher currently than it was at 140 USD a barrel in 2008 as reported by Full
Fact (2022). According to RAC Foundation (2022), in the backdrop of the war between
Russia and Ukraine, the price of petrol in the United Kingdom increased by 3.8p from 149.2p
to 153p per liter. Not only were petrol prices higher in the United Kingdom, but oil prices
were also higher - Diesel touched a multi-year high of 158,6p and increased by 5.2p from
153.4p to 158.6p a barrel as the crisis began.
In general, the United States' imported oil from Russia is quite small, accounting for
only about 8% of total imports, according to Sy (2022), so the United States is mostly
unaffected. However, following the Russian and Ukraine war, the price of gasoline in the
United States soared dramatically compared to its own price in the previous years' statistics,
causing significant harm to the US petroleum market. As a result, oil prices in the United
States are rising at the same rate as in Europe. Gasoline prices in the United States have risen
to $4 a gallon. This is one of the highest prices the US has seen since July 2008, according to
Ryssdal (2022). The average price of a gallon of gasoline in the United States has risen 45
cents per gallon and peaked at $4.06. The sharp increase in gasoline prices has shattered a 14-
year high and is now roughly 50% higher than a year ago. Furthermore, the price of
benchmark US oil increased by 2% to roughly $118 per barrel in agreement with Kai Ryssdal
(2022). He also predicts that the US will soon establish a new record high of $4.50 per gallon.
In order to challenge Russia, both the European Union and the United States have had
to make trade-offs and suffer economic losses, particularly in the area of oil. It is
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