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Russia's war against Ukraine could spiral into the world's worst energy crisis since the 1970s, a top economic historian says

Mar 4, 2022, 18:34 IST
Business Insider
Germany protests in support of Ukraine.Getty Images Europe
  • The world may be facing the worst energy crisis since the Arab oil embargo and the Iranian revolution.
  • "This is a supply crisis. It's a logistics crisis. It's a payment crisis," IHS Markit's Dan Yergin told CNBC.
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Russia's bloody incursion into Ukraine could disrupt energy markets with consequences unseen since the oil crises of the 1970s, according to Daniel Yergin, vice chairman of IHS Markit.

The US and its allies have so far been careful to avoid imposing sanctions on Russian oil and gas, because doing so could impede global economic growth and supply chain recovery in the sector.

Cutting off the flow of energy from Russia would likely push up the prices of gas, rattle financial markets further during an already volatile period of high inflation, and hit consumer wallets.

Despite the absence of direct sanctions on energy, the West has made it much harder for Russian companies to ship tankers of oil and gas, given the ban on vessels in European ports.

"This is going to be a really big disruption in terms of logistics, and people are going to be scrambling for barrels," Yergin told CNBC, according to a Thursday report. "This is a supply crisis. It's a logistics crisis. It's a payment crisis, and this could well be on the scale of the 1970s."

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Exports from Russia, the world's second-largest oil producer, account for around 8% of the world's global supply. The country accounts for around 40% of the EU's gas imports and 30% of its oil imports, according to UBS.

NATO members, which receive half of Russia's exports, are bound to see disruptions, Yergin said. What could help the situation is solid communication between governments enforcing sanctions, according to him.

Experts are already warning energy assets would suffer the worst fate in financial markets from the war in Ukraine. JPMorgan estimates Brent crude could end the year at $185 a barrel, up nearly 70% from current levels of around $110.

"This could be the worst crisis since the Arab oil embargo and the Iranian revolution in the 1970s," Yergin said.

Energy has been a foreign policy tool for nations ever since international trade in fossil fuels has existed. The Arab oil embargo, in which Arab oil producers cut production by 5% to target the US for its support of Israel, was the first oil crisis that led to major price jumps. The Iranian revolution of 1979 was the second major one.

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In just a week, Russia has seen major oil companies retreat from local investments, with BP, Shell, Equinor, and ExxonMobil quitting their ventures in the country.

"What we haven't seen before is the big reputational issue as well, companies not wanting to do business with Russia," Yergin said.

"Vladimir Putin in a week has destroyed what he spent 22 years building, an economy that was basically integrated with the global economy. Now what's happened is Russia is unplugged from the global economy," he said.

The economic historian, the author of energy market best-seller "The Prize" that won him a Pulitzer award, warned the crisis is hitting just as the market was already facing tight supply and limited alternatives.

OPEC has so far refused to speed up its production increases and analysts say the group may lack the spare capacity to make up for Russian exports.

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Crude oil prices keep going higher with "self-sanctioning" buyers avoiding Russian crude, and OPEC seems to be more worried about not upsetting Russia rather than responding to the crisis at hand.

Oil has been trading at decade highs between $110 to $120 a barrel in the past few days — its highest since 2014.

Read more: Morgan Stanley: Buy these 9 stocks to take advantage of the ongoing European VC boom after start-ups' record-breaking 2021

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