Chart of the Week: Oil Price Surge Beyond US$100 Spells Trouble for Global Economy

February 25, 2022

Russia’s invasion of Ukraine carries huge risks for a world economy that is still struggling to recover from the Covid-19 pandemic shock.

The conflict could be the most serious war in Europe since the 1940s as Russian forces carried out airstrikes, captured army bases and advanced towards the capital of Ukraine; Kiev.

The assault happened after weeks of tensions that sent global markets on a roller-coaster ride.

While wars are inherently unpredictable, Russia’s role as the world’s second-largest producer of natural gas and one of the world’s largest oil-producing nations, is expected to have a severe impact on the energy market.

Oil price at highest level since 2014

In response to that, oil prices surpassed the US$100 per barrel level for the first time since 2014. As of writing, the brent crude oil is trading at US$101.16 per barrel.

The sanctions response by the US, Canada, Britain and the European Union (EU), have (so far) avoided Russia’s energy suppliers.

This is in part due to the EU’s reliance on energy imports from Russia.

However, even without the sanctions, major gas pipelines that run through Ukraine could be hit during the fighting.

There is also the impact on logistics to shift oil out of certain areas now that military operation iare already underway.

Risks of stagflation rising

The rising oil price will continue to put pressure on inflation. It’s also likely to squeeze household incomes and could even dent the economic recovery anticipated for this year.

This could create a new headache for the US Federal Reserve and the European Central Bank (ECB).

While it is still too early to make that call, a prolonged war involving Russia could cause a major shock to the supply of oil, which could send the price much higher than the current US$100 per barrel level.

This would cause a major blow to the economic recovery and could even prompt a downturn if the current tensions escalate further.

Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.

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