tag:theconversation.com,2011:/uk/topics/oil-prices-11112/articlesOil prices – The Conversation2023-10-20T12:26:48Ztag:theconversation.com,2011:article/2159302023-10-20T12:26:48Z2023-10-20T12:26:48ZHow the Israel-Hamas war could affect the world economy and worsen global trade tensions<figure><img src="https://images.theconversation.com/files/554774/original/file-20231019-19-w3dpvj.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3335%2C2070&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/stock-exchange-market-trading-concepts-227858692">Rawpixel.com/Shutterstock</a></span></figcaption></figure><p>Global geopolitical tensions often play a pivotal role in shaping people’s perceptions of economic growth. <a href="https://www.matteoiacoviello.com/gpr_files/GPR_PAPER.pdf">Research shows</a> concern about such issues can cause people and businesses to become more cautious about spending and investing, which can ultimately lead to economic recession.</p>
<p>The recent escalation of the <a href="https://www.bbc.co.uk/news/world-middle-east-67039975">Israel-Palestine conflict</a> is no different. Investors around the world are worried about the repercussions of this war – particularly in light of an already <a href="https://www.oecd-ilibrary.org/sites/1f628002-en/index.html?itemId=/content/publication/1f628002-en">bleak picture for global economic growth</a>. </p>
<p>Hamas’s <a href="https://apnews.com/article/israel-palestinians-gaza-hamas-rockets-airstrikes-tel-aviv-11fb98655c256d54ecb5329284fc37d2">October 7 attack</a> on southern Israel is the latest chapter of a cycle of violence that has been going on in this region for decades and, sadly, seems to have no end in sight. While the reasons behind these events are complex, the conflict’s potential immediate and long-term economic ramifications are easier to grasp. </p>
<p>After all, if the Russia-Ukraine war has taught us one thing, it’s that we should be mindful of the intricate interdependencies that shape the global economic and geopolitical landscape.</p>
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<a href="https://theconversation.com/ukraine-and-the-financial-markets-the-winners-and-losers-so-far-179015">Ukraine and the financial markets: the winners and losers so far</a>
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<h2>How conflicts can affect the economy</h2>
<p>Internal and inter-state conflicts often have <a href="https://www.jstor.org/stable/20798955#:%7E:text=The%20results%20suggest%20that%2C%20on,is%20higher%20for%20international%20conflicts.">a significant effect</a> on stock market indices, exchange rates, and commodity prices – sometimes even sending prices higher in the lead-up to hostilities. The longer-term economic impact is typically more complicated to assess, however. The lasting effects of even seemingly dramatic events on investor behaviour can be hard to predict. </p>
<p>Conflicts in the Middle East tend to lead to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0140988319303184#preview-section-snippets">spikes in oil prices</a> – think of the <a href="https://www.federalreservehistory.org/essays/oil-shock-of-1973-74">OPEC oil embargo</a> of 1973-1974, the <a href="https://www.brookings.edu/articles/what-irans-1979-revolution-meant-for-us-and-global-oil-markets/#:%7E:text=barrel%20in%20mid%2D-,1980,-.">Iranian revolution</a> of 1978-1979, the <a href="http://news.bbc.co.uk/1/hi/business/7431805.stm#:%7E:text=crude%20oil%20prices%20to%20more%20than%20double">Iran-Iraq War</a> initiated in 1980, and the first <a href="https://www.jstor.org/stable/41322669">Persian Gulf War</a> in 1990-91. Since the region accounts for <a href="https://www.statista.com/statistics/269076/distribution-of-global-oil-production-since-2009/">nearly a third of global oil supply</a>, any instability can create market uncertainty based on <a href="https://www.eia.gov/energyexplained/oil-and-petroleum-products/prices-and-outlook.php">concerns about interruptions</a> to global oil supply.</p>
<p>This uncertainty <a href="https://www.sciencedirect.com/science/article/abs/pii/S0165188921000130">is reflected in the risk premium</a> in oil markets. This is the price paid for oil traded ahead of time in the futures markets versus the real-time price of oil. It reflects the profits that speculators expect to receive from buying and selling oil during a time of conflict, as well as the hedging needs of businesses that produce and consume oil and their concerns about supply and demand. </p>
<p>And so, the effect of the latest Israel-Hamas conflict on global financial markets will depend on the involvement of other major regional powers. If the conflict remains between Israel and Hamas, the effect will probably be limited and arguably exclusive to countries with direct trade exposure to Israel or Palestine. </p>
<p>But if the conflict spreads to major oil-producing nations in the region such as Iran, the global economy could face severe repercussions as energy costs for businesses and households could spike if supply is interrupted.</p>
<p>Higher energy prices would hamper central banks’ efforts to tame inflation pressures in most advanced and emerging economies. If this leads to a “higher for longer” monetary policy that keeps interest rates elevated, it would push up the cost of borrowing and refinancing by governments, companies and people.</p>
<p>History can offer some insights into how the impact on the global economy could unfold under these different scenarios. For instance, the 50-day war between Israel and Hamas in 2014, <a href="https://www.independent.co.uk/news/world/middle-east/israelgaza-conflict-50day-war-by-numbers-9693310.html">which killed 2,200 people</a>, mostly civilians, had <a href="https://www.sciencedirect.com/science/article/pii/S1059056017308201">no significant effect</a> on the global economy or financial markets. </p>
<p>Yet, when Israel and Hezbollah clashed in Lebanon in 2006, oil prices <a href="https://www.nytimes.com/2006/07/25/world/middleeast/25oil.html">surged globally</a> due to fears of a broader conflict in the Middle East.</p>
<h2>What to expect this time</h2>
<p>Unfortunately, there is another factor to consider at the moment. The escalation of the Israel-Palestine conflict has happened alongside the realignment of various <a href="https://www.cnbc.com/2023/09/18/biden-backs-economic-corridor-as-geopolitical-alliances-fragment-globe.html">global alliances</a>. This slow creep of “deglobalisation” can be seen in a <a href="https://www.nber.org/papers/w31115">shift in trade policies</a> in recent years. </p>
<p>Countries such as the US and UK are relocating economic activity including sourcing or manufacturing products from different countries out of concern about relying on suppliers in potentially hostile regions, as well as the impact of imports from low-wage countries on struggling local labour markets</p>
<p>At the moment, these shifts can also be seen in the reactions to the Hamas attack on Israel. A <a href="https://www.un.org/unispal/history/#:%7E:text=After%20looking%20at%20alternatives%2C%20the,(II)%20of%201947">two-state solution</a>) to the Israel/Palestine conflict was initially laid out by the United Nations in 1947 and reaffirmed in 1974, with almost unanimous support around the world. </p>
<p>But there has been <a href="https://www.washingtoninstitute.org/policy-analysis/international-reactions-hamas-attack-israel">some nuance</a> in the international reactions to the attack. With most western countries quickly voicing support for Israel’s right to defend itself, while countries like China and Russia <a href="https://edition.cnn.com/2023/10/19/china/china-xi-israel-hamas-ceasefire-comment-intl-hnk/index.html#:%7E:text=China%20and%20Russia%20have%20both,US%20and%20leaders%20across%20Europe">called for a ceasefire</a> without taking a stance on Hamas. </p>
<p>This suggests that the issue of Israel-Palestine could tie in with the broader trend towards the new geopolitical divisions that were already starting to emerge before Hamas’s attack. </p>
<p>A prolonged conflict between Israel and Palestine, especially with the involvement of major regional powers, could further accelerate this <a href="https://www.nber.org/papers/w31661">global realignment</a> and have detrimental consequences for global economic growth. </p>
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Read more:
<a href="https://theconversation.com/china-us-tensions-how-global-trade-began-splitting-into-two-blocs-188380">China-US tensions: how global trade began splitting into two blocs</a>
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<figure class="align-center ">
<img alt="Gold bars on top of dollar bills and a printed chart." src="https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/554775/original/file-20231019-19-37k6c0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Investors often invest in gold as a</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/gold-bullion-ingot-stack-on-america-1064227718">eamesBot/Shutterstock</a></span>
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<p>Under these circumstances, investors are already bracing for increased financial volatility across the board – from stocks and government bonds to commodity markets. So-called safe-haven assets like gold are <a href="https://econpapers.repec.org/article/wlyeconjl/v_3a128_3ay_3a2018_3ai_3a616_3ap_3a3266-3284.htm">typically used as protection</a> against overwhelming economic uncertainty. The <a href="https://nz.finance.yahoo.com/news/gold-climbs-four-week-high-015019215.html">price of gold</a> has shot up following the latest escalation in the Israel-Palestine conflict.</p>
<p>Financial markets will continue to monitor the conflict between Israel and Hamas for signs of escalation. Anything that pushes oil prices up further will reignite fears of higher inflation. </p>
<p>Unfortunately, this is happening just as many countries were starting to see inflation slow again after two years of <a href="https://ycharts.com/indicators/us_consumer_price_index_yoy#:%7E:text=Basic%20Info,long%20term%20average%20of%203.28%25.">persistently high consumer prices</a>.</p><img src="https://counter.theconversation.com/content/215930/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daniele Bianchi does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>History shows how conflicts can create uncertainty that can rattle financial markets. This could feed into consumer price inflation, keeping it higher for longer.Daniele Bianchi, Associate Professor of Finance, Queen Mary University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2138832023-10-13T14:59:56Z2023-10-13T14:59:56ZWestern sanctions haven’t curbed Russian oil profits, but the green energy transition could<figure><img src="https://images.theconversation.com/files/552791/original/file-20231009-23-kjud9c.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5464%2C3034&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Oil tankers at sea.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/aerial-view-oil-gas-petrochemical-tanker-1396953689">Avigator Fortuner/Shutterstock</a></span></figcaption></figure><p>Western sanctions that put <a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_22_7468">a price cap</a> on Russian oil exports from December 2022 aimed to cause the country significant economic pain after its invasion of Ukraine last year. The idea was to curtail the amount Russia makes from its oil while ensuring it continues to flow into the global market to reduce price pressures on consumers around the world. </p>
<p>Back then, oil prices were trading around US$80 (£66) per barrel (/bbl). More than 10 months later, the opposite has happened: Russian exports have declined but its revenues have increased, providing it with <a href="https://www.politico.eu/article/russia-crude-oil-price-sanction-ukraine-war/">significant funds</a> to continue the war. </p>
<p>This is because since July 2023, oil prices have been above US$80/bbl, exceeding US$95/bbl at times – levels last seen in November 2022. Even though it was subject to a price cap, Russian oil has been in even greater demand due to a squeeze on supply in global oil markets.</p>
<p>Russia’s global oil market position doesn’t seem to be threatened by sanctions and caps. But domestic problems and market changes that have been brewing long before the war in Ukraine could affect Russia’s oil industry for a long time to come.</p>
<p><strong>Oil prices rising again:</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Line chart showing oil price (Brent) falling from around $98/bbl in November 2022 but rising again from the end of August 2023." src="https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=416&fit=crop&dpr=1 600w, https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=416&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=416&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/553658/original/file-20231013-26-5idwgg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Brent is a global benchmark for oil prices.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com/chart/?symbol=BRENT">Trading View</a></span>
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<h2>How does the price cap work?</h2>
<p>The price cap restricts the sale of Russian oil to third parties such as China and India. Countries can still buy that oil but they must use services such as shipping and insurance provided by G7, EU and Australian entities, and can also only do so if the oil is sold below a certain price. This price was set at US$60/bbl (after December 5 2022) for oil and around US$100/bbl (after February 5 2023) for refined products such as diesel. </p>
<p>Western providers of insurance and maritime services make up <a href="https://home.treasury.gov/news/featured-stories/the-price-cap-on-russian-oil-a-progress-report#:%7E:text=In%20December%202022%2C%20the%20Coalition,oil%20at%20%2460%20per%20barrel">around 90%</a> of the market, leaving those that want to buy Russian oil with few alternatives but to respect the cap constraints.</p>
<p>A <a href="https://home.treasury.gov/news/featured-stories/the-price-cap-on-russian-oil-a-progress-report#:%7E:text=In%20December%202022%2C%20the%20Coalition,oil%20at%20%2460%20per%20barrel">US Treasury report</a> published in May 2023 claimed that the price cap achieved its goals. It reported a decline in Russian oil revenues, even though the country exported around 5-10% more crude oil in April 2023 compared to March 2022.</p>
<p>Russian oil was also trading at a significant discount compared to global oil prices, as Western countries had hoped when they created the price cap. By June 2023, Russia’s oil export revenues plunged to US$11.8 billion, nearly <a href="https://www.iea.org/reports/oil-market-report-july-2023">half the levels</a> of a year before. </p>
<p>But by the end of August 2023, a switch had occurred. Russian oil export revenues recovered to US$17 billion even as exports hit an 11-month low, averaging 5.27 million barrels a day (Mb/d) in September 2023 – the lowest <a href="https://www.iea.org/reports/oil-market-report-september-2023">since September 2022</a>, and 0.65 Mb/d <a href="https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/090423-russian-oil-exports-hit-11-month-low-as-refinery-downtime-output-cuts-bite">below pre-Ukraine war levels</a>. </p>
<p>Similarly, the country’s oil production in August 2023 dropped to 10.43 Mb/d in August 2023 compared to 11 Mb/d <a href="https://www.eia.gov/outlooks/steo/archives/sep23.pdf">in December 2022</a>.</p>
<p>Several factors have helped the Kremlin replenish its oil coffers even though it’s selling less oil. First, oil prices increased significantly over the summer of 2023. This was largely a result of <a href="https://www.eia.gov/todayinenergy/detail.php?id=60462#">production cuts announced by OPEC members</a>, primarily Saudi Arabia and its allies, led by Russia in what is known as OPEC+. </p>
<p>With less oil around, cheaper Russian oil appeals to many buyers around the world, <a href="https://www.reuters.com/markets/commodities/asia-crude-imports-hit-high-china-india-gorge-russian-oil-russell-2023-08-03/">particularly in Asia</a>. Russia has been able to use this to replace eroding European demand.</p>
<p>Breaches of the cap have also been reported, particularly <a href="https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/090423-russian-oil-exports-hit-11-month-low-as-refinery-downtime-output-cuts-bite">since July 2023</a>. Russia has significantly decreased its reliance on western maritime and insurance services, reducing the portion of its oil trade subject to the cap. </p>
<p>Almost <a href="https://www.bruegel.org/dataset/russian-crude-oil-tracker">three-quarters of all seaborne Russian crude</a> flows travelled without western insurance in August, reported to be up from <a href="https://www.ft.com/content/72ae377d-8435-4d34-92b6-f55c47a662c4?desktop=true&segmentId=7c8f09b9-9b61-4fbb-9430-9208a9e233c8#myft:notification:daily-email:content">about 50% in spring</a>. </p>
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<img alt="Line chart showing growth in tankers transporting Russian crude with non-G7/EU/Norway insurance." src="https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=283&fit=crop&dpr=1 600w, https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=283&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=283&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=356&fit=crop&dpr=1 754w, https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=356&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/552784/original/file-20231009-19-df97eo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=356&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Almost three-quarters of all seaborne Russian crude flows travelled without western insurance in August 2023.</span>
<span class="attribution"><a class="source" href="https://www.bruegel.org/dataset/russian-crude-oil-tracker">Bruegel analysis of CREA Russian Oil API</a></span>
</figcaption>
</figure>
<h2>Trouble brewing</h2>
<p>Long before the war in Ukraine started, several studies – including research published by the Russian government – highlighted the challenges facing the country’s oil industry. </p>
<p>Russia’s Energy Strategy 2035 (published in 2019) presented two main scenarios for the country’s oil production. The optimistic scenario sees oil production for 2024-2035 at only 0.77% above 2018 production levels. In its <a href="https://www.ifri.org/en/publications/etudes-de-lifri/russieneireports/russias-energy-strategy-2035-struggling-remain">pessimistic scenario</a>, Russia’s oil output slips into a 12% decline by 2035 compared to 2018 levels. </p>
<p>An even <a href="https://ogst.ifpenergiesnouvelles.fr/articles/ogst/full_html/2019/01/ogst190118/ogst190118.html">more pessimistic scenario</a> was suggested by a French research institute called Institut Francais du Petrole (IFP) in 2019, which said Russian oil would shrink by 41% in 2040 compared to 2018 levels. </p>
<p>The flight of western capital, investment and technologies from Russia following its invasion of Ukraine will only worsen all of these scenarios. But the main driver behind such outlooks is the reduction in output from brownfields (projects that have been operating for some time) in Western Siberia – the Soviet-era heartland of Russian oil production.</p>
<p>Alternative supplies are in remote areas (such as the Arctic circle), making them more complex and costly to develop. </p>
<p>Furthermore, as the transition to lower-carbon energy sources accelerates, oil demand is bound to hit a peak. The <a href="https://www.iea.org/news/growth-in-global-oil-demand-is-set-to-slow-significantly-by-2028">International Energy Agency expects</a> this to happen before the end of this decade. Notable uncertainty surrounds such an outlook, but in a shrinking market the axe will fall on high-cost producers first. </p>
<p>New Russian oil fields developed in 2019 break even (including taxes) at an average of US$40-50/bbl. This is on the higher end, particularly <a href="https://www.aramco.com/-/media/images/investors/saudi-aramco-prospectus-cma-en.pdf?la=en&hash=8887077F5ACCE26916E6DA8A953B44771D0C46F1">compared to</a> producers in the Middle East, where costs can even be less than US$10/bbl for some fields in Saudi Arabia, for example.</p>
<p>Of course, the carbon intensity of a country’s oil production will also have a significant impact on producers. As the world attempts to transition to lower carbon forms of energy, buyers will want to reduce the carbon footprint of their energy imports. Russia’s carbon intensity is <a href="https://www.science.org/doi/10.1126/science.aar6859">double that of Saudi Arabia</a>.</p>
<p>While the price cap has done little to erode Russia’s power in the global oil markets, it’s only a matter of time before its oil sector’s legacy problems and high carbon intensity start to squeeze its oil riches. This is likely to have a much more sustained negative impact on Russia’s oil wealth.</p><img src="https://counter.theconversation.com/content/213883/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carole Nakhle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>An initial squeeze on demand for Russian oil due to western sanctions was temporary but the country’s oil industry might have bigger problems.Carole Nakhle, Energy Economist, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2044102023-04-25T16:55:08Z2023-04-25T16:55:08ZGlobal economic uncertainty means oil prices – and your fuel bill – will continue to surprise this year<figure><img src="https://images.theconversation.com/files/522655/original/file-20230424-26-do499z.jpg?ixlib=rb-1.1.0&rect=242%2C148%2C8501%2C4244&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Oil price uncertainty.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/future-oil-concept-drum-question-mark-1691774782">Holmes Su/Shutterstock</a></span></figcaption></figure><p>Oil prices have confounded expectations in the first quarter of 2023. Brent – a major global benchmark – hit <a href="https://www.reuters.com/business/energy/oil-steadies-investors-take-stock-banking-crisis-2023-03-17/">a low of US$72 (£58) a barrel on March 17</a>, while the world’s other main benchmark, WTI, dropped to less than US$66 a barrel. This is a far cry from the nearly US$114 and US$103 a barrel, respectively, reached on <a href="https://www.reuters.com/business/energy/oil-futures-open-higher-iea-supply-warning-2022-03-17/">the same day a year before</a> following the invasion of Ukraine by Russia, a major oil producer. </p>
<p>These unexpectedly low prices remain even as the war in Ukraine continues with no clear end in sight. Other developments have also failed to boost prices as expected. China, the world’s largest importer of crude oil, <a href="https://theconversation.com/chinese-economic-growth-may-never-recover-from-covid-heres-why-195872">abandoned its zero-COVID policy in December 2022</a>, creating <a href="https://oilprice.com/Energy/Crude-Oil/From-Zero-Covid-To-Energy-Demand-Explosion-The-Impact-Of-Chinas-Reopening.html">expectations that Chinese oil demand would quickly return</a> with a vengeance, propelling prices higher. A couple of months before this, OPEC+ (the cartel of certain oil-producing nations) had announced a <a href="https://www.reuters.com/business/energy/opec-heads-deep-supply-cuts-clash-with-us-2022-10-04/">production cut of 2 million barrels a day</a> (mb/d) – roughly 2% of world supply and the largest cut since 2020. </p>
<p><a href="https://www.reuters.com/business/energy/sarabia-other-opec-producers-announce-voluntary-oil-output-cuts-2023-04-02/">A surprise announcement of 1.1 mb/d of cuts</a> by OPEC+ on April 2 did boost prices. On top of a 0.5 mb/d decrease <a href="https://www.reuters.com/business/energy/russia-cut-oil-output-by-500000-bpd-march-2023-02-10/">announced by Russia in February</a>, this has brought the group’s cuts to 1.6 mb/d. And by mid-April Brent reached US$86 and WTI US$83 per barrel. </p>
<p>But oil has now <a href="https://www.reuters.com/markets/commodities/oil-prices-slide-uncertainty-over-global-economic-outlook-rate-hikes-2023-04-24/">started to retreat again</a>, an unexpected development during a war involving a major oil exporter, and at a time when a giant consumer like China is reopening after three years of economic isolation.</p>
<p>This shows that oil price forecasts continue to be unreliable. The economic outlook and Chinese consumption growth are key to demand expectations, while Russia is the wild card in terms of supply. Until uncertainty around these three factors dissipates, global oil markets will not have a clear direction.</p>
<p><strong>Oil price movements:</strong></p>
<h2>Economic outlook</h2>
<p>Oil demand is closely linked to economic growth because a slowing economy shrinks income, leading people to curtail expenditure and travel less, and slowing down manufacturing that uses oil. Various economic forecasts have recently highlighted the major challenges facing the global economy, but widely prevailing uncertainty seems to top the list. </p>
<p>In its <a href="https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023">April 2023 World Economic Outlook</a>, the International Monetary Fund (IMF) emphasised a high level of uncertainty “amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of COVID”. </p>
<p>The <a href="https://www.worldbank.org/en/news/press-release/2023/03/27/global-economy-s-speed-limit-set-to-fall-to-three-decade-low">World Bank has also warned</a> that “a lost decade could be in the making for the global economy” as “nearly all the economic forces that powered progress and prosperity over the last three decades are fading”. </p>
<p>April’s <a href="https://momr.opec.org/pdf-download/">OPEC+ Monthly Oil Market Report</a> kept its forecast for economic growth and oil demand largely unchanged from previous reports, but said: “The global economy will continue to navigate through challenges including high inflation, higher interest rates particularly in the Eurozone and the US, and high debt levels in many regions.” It stated that “these uncertainties surrounding current oil market dynamics” were behind its decision to cut production.</p>
<h2>The China factor</h2>
<p>China is the world’s <a href="https://www.statista.com/statistics/271622/countries-with-the-highest-oil-consumption-in-2012/">second-largest oil consumer</a> and the <a href="https://www.investopedia.com/insights/worlds-top-economies/">second-largest economy</a> after the US. So all eyes have been on its oil demand since the country ended the nearly three-year zero-COVID policy that severely restricted its peoples’ mobility and economic activity. </p>
<p>Today, it is the main bullish factor in many global economic forecasts. The IMF’s managing director <a href="https://www.chinadaily.com.cn/a/202304/14/WS64396987a310b6054facdc05.html">recently said</a>:</p>
<blockquote>
<p>China this year is going to contribute about one-third of global [economic] growth. We calculated that 1% more growth in China translates into 0.3% more growth for the economies that are connected to China. </p>
</blockquote>
<p>The <a href="https://www.iea.org/reports/oil-market-report-april-2023">IEA believes China</a> will account for half of the global increase in oil demand this year. <a href="https://www.goldmansachs.com/insights/pages/chinas-reopening-is-poised-to-boost-global-growth.html">Goldman Sachs expects</a> China’s oil demand growth to boost Brent by roughly US$15 per barrel.</p>
<p>However, such enthusiasm is not universally shared. A <a href="https://www.cnbc.com/2023/04/07/chinas-economic-recovery-is-taking-longer-than-expected-citi-says.html">Citibank report</a> says China’s post-COVID recovery seems slower than expected. Being an export-driven economy, the Asian powerhouse is exposed to the health of the rest of the world. A weakening global economy will reduce demand for Chinese exports, with negative repercussions on its economy and therefore oil demand.</p>
<p>Similarly, <a href="http://www.stats.gov.cn/english/PressRelease/202303/t20230315_1937167.html">China’s National Bureau of Statistics</a> said “the external environment is even more complex, inadequate demand remains prominent and the foundation for economic recovery is not solid yet”. Or, as the Saudi energy minister reportedly said when asked about an oil demand rebound recently: “<a href="https://www.reuters.com/article/us-global-oil-opec-saudi-idUSKBN2AX23F">I’ll believe it when I see it</a>.” </p>
<h2>Russia: not done yet</h2>
<p>As a major oil producer and exporter, Russia also has a massive influence on global oil markets. Despite sanctions since the beginning of the war in Ukraine (and following the annexation of Crimea in 2014), Russia continues to be the world’s <a href="https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2">third-largest oil producer</a> after the US and Saudi Arabia.</p>
<p>When Russia invaded Ukraine, oil prices spiked due to fears of a loss of Russian supply. <a href="https://www.iea.org/reports/oil-market-report-march-2022">The IEA warned</a> the resulting 3 mb/d loss (around one-third of Russia’s total and almost 3% of world production) could produce “the biggest supply crisis in decades”. Analysts from investment bank <a href="https://www.bloomberg.com/news/articles/2022-07-01/jpmorgan-sees-stratospheric-380-oil-on-worst-case-russian-cut?sref=DF2XabZQ">JP Morgan said</a> Russia could cut up to 5 mb/d of production driving global oil prices to a “stratospheric” US$380 per barrel. </p>
<p>Such gloomy scenarios did not materialise. Russian oil continued to flow but <a href="https://www.reuters.com/business/energy/russian-sanctions-shift-oil-price-making-power-asia-europe-2023-03-14/">changed direction from Europe to Asia</a>, helping to ease price pressure for consumers everywhere. And Russia’s cuts in retaliation for sanctions have so far been smaller than expected. Of course, it could cut more, especially if this would put more economic pressure on the west and affect support for Ukraine. </p>
<p>This cocktail of uncertainties should encourage a more cautious stance when it comes to predicting oil prices, this year at least. Some analysts <a href="https://www.reuters.com/business/energy/barclays-cuts-2023-oil-price-forecasts-resilient-russian-output-2023-03-08/#:%7E:text=The%20bank%20cut%20its%20average,year%20and%20WTI%20%2492%2Fb.">have already reduced their 2023 price forecasts</a>, with estimates varying between US$81 and US$100 a barrel. </p>
<p>Expect more revisions. As <a href="https://www.aeaweb.org/articles?id=10.1257/jep.30.1.139">one study</a> that tracked the evolution of oil prices over four decades said: “all price expectations are subject to error”.</p><img src="https://counter.theconversation.com/content/204410/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Carole Nakhle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Alongside the global economic outlook, Russian supply and Chinese demand are contributing to ‘a cocktail of uncertainty’ for oil prices.Carole Nakhle, Energy Economist, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1990462023-02-17T13:25:25Z2023-02-17T13:25:25ZThe war in Ukraine hasn’t left Europe freezing in the dark, but it has caused energy crises in unexpected places<figure><img src="https://images.theconversation.com/files/510639/original/file-20230216-18-pzle03.jpg?ixlib=rb-1.1.0&rect=0%2C15%2C5224%2C3101&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People protest in Dhaka, Bangladesh, over daily power cuts, July 27, 2022.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/this-photo-taken-on-july-27-2022-shows-that-ganosamhati-news-photo/1242141617">Sony Ramany/NurPhoto via Getty Images</a></span></figcaption></figure><p>Through a year of war in Ukraine, the U.S. and most European nations have worked to help counter Russia, in supporting Ukraine both with armaments and in world energy markets. Russia was Europe’s main energy supplier when it invaded Ukraine, and President Vladimir Putin threatened to leave Europeans to freeze “<a href="https://www.reuters.com/business/energy/putin-blames-germany-west-nord-stream-1-shutdown-2022-09-07/">like a wolf’s tail</a>” – a reference to a famous Russian fairy tale – if they imposed sanctions on his country. </p>
<p>But thanks to a combination of preparation and luck, Europe has avoided blackouts and power cutoffs. Instead, less wealthy nations like Pakistan and India have contended with electricity outages on the back of unaffordably high global natural gas prices. As a global energy policy analyst, I see this as the latest evidence that less wealthy nations often suffer the most from globalized oil and gas crises. </p>
<p>I believe more volatility is possible. Russia has said that it will cut its crude oil production starting on March 1, 2023, <a href="https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/021323-russia-to-send-most-2023-oil-exports-to-friendly-countries-after-output-cut-announcement">by 500,000 barrels per day</a> in response to Western energy sanctions. This amount is about 5% of its current crude oil production, or 0.5% of world oil supply. Many analysts expected the move, but it <a href="https://www.bloomberg.com/news/articles/2023-02-10/russia-plans-to-cut-march-oil-output-by-500-000-b-d-novak-says">raises concerns</a> about whether more reductions could come in the future. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/Kh2Fdt2QRTA?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Europe has avoided an energy crisis in the winter of 2022-2023, but the coming year could be more challenging.</span></figcaption>
</figure>
<h2>How Europe has kept the lights on</h2>
<p>As Russia’s intent toward Ukraine became clear in late 2021 and early 2022, many governments and energy experts feared one result would be <a href="https://theconversation.com/can-the-us-find-enough-natural-gas-sources-to-neutralize-russias-energy-leverage-over-europe-175824">an energy crisis in Europe</a>. But one factor that Putin couldn’t control was the weather. Mild temperatures in Europe in recent months, along with proactive conservation policies, have reduced natural gas consumption in key European markets such as Germany, the Netherlands and Belgium <a href="https://www.reuters.com/business/energy/europe-should-thank-mild-autumn-averting-gas-crisis-this-winter-kemp-2022-12-16/">by 25%</a>. </p>
<p>With less need for electricity and natural gas, European governments were able to delay drawing on natural gas inventories that they built up over the summer and autumn of 2022. At this point, a continental energy crisis is much less likely than many forecasts predicted. </p>
<p>European natural gas stockpiles are <a href="https://www.bloomberg.com/news/articles/2023-02-13/european-natural-gas-is-stuck-in-storage-after-prices-plunged-from-peak">around 67% full</a>, and they will probably still be 50% full at the end of this winter. This will help the continent position itself for next winter as well. </p>
<p>The situation is similar for coal. European utilities stockpiled coal and <a href="https://www.ft.com/content/f662a412-9ebc-473a-baca-22de5ff622e2">reactivated 26 coal-fired power plants</a> in 2022, anticipating a possible winter energy crisis. But so far, the continent’s coal use has risen only 7%, and the reactivated coal plants are averaging <a href="https://ember-climate.org/insights/research/european-electricity-review-2023/">just 18% of their operating capacity</a> </p>
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<h2>The U.S. role</h2>
<p>Record-high U.S. energy exports in the summer and fall of 2022 also buoyed European energy security. The U.S. exported close to 10 million cubic meters per month of liquefied natural gas in 2022, <a href="https://www.reuters.com/business/energy/us-lng-exports-both-lifeline-drain-europe-2023-maguire-2022-12-20/">up 137% from 2021</a>, providing roughly half of all of Europe’s imported LNG. </p>
<p>Although domestic U.S. natural gas production <a href="https://www.reuters.com/business/energy/us-natgas-output-hit-record-high-2023-demand-fall-2023-01-10/">surged to record levels</a>, some producers had the opportunity to export into high-priced global markets. As a result, surpluses of summer natural gas didn’t emerge inside the U.S. market, as might otherwise have happened. Combined with unusually hot summer temperatures, which drove up energy demand for cooling, the export surge socked U.S. consumers with the highest natural gas prices they had experienced <a href="https://www.cnn.com/2022/08/17/energy/natural-gas-inflation-heat-wave/index.html">since 2008</a>. </p>
<p>Prices also soared at U.S. gas pumps, reaching or exceeding US$5 per gallon in the early summer of 2022 – the <a href="https://www.forbes.com/sites/dereksaul/2022/06/09/5-milestone-gas-prices-hit-an-all-time-national-high/?sh=5ce0940654bd">highest average ever recorded</a> by the American Automobile Association. The U.S. exported <a href="https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/oil/061022-feature-us-drivers-in-for-expensive-summer-as-refiners-grapple-with-high-demand">close to 1 million barrels per day</a> of gasoline, mainly to Mexico and Central America, plus some to France, and consolidated its position as a <a href="https://www.eia.gov/energyexplained/us-energy-facts/imports-and-exports.php">net oil exporter</a> – that is, it exports more oil than it imports.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A tugboat leads a massive tanker through marshes." src="https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/510664/original/file-20230216-14-ey1fpa.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A tugboat helps guide the LNG Endeavor, a French liquefied natural gas tanker, through Calcasieu Lake near Hackberry, La., March 31, 2022. U.S. LNG exports to Europe reached record levels in 2022 as the continent prepared to sever energy ties with Russia.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FloatingLNGClimateImpacts/40c4911770d54b64924b7fff060ebd22/photo">AP Photo/Martha Irvine</a></span>
</figcaption>
</figure>
<p>Much like Europeans, U.S. consumers had to pay high prices to outbid other global consumers for oil and natural gas amid global supply disruptions and competition for available cargoes. High gasoline prices were <a href="https://theconversation.com/federal-gas-tax-holiday-biden-says-it-will-provide-a-little-bit-of-relief-but-experts-say-even-that-may-be-a-stretch-185676">a political headache for the Biden administration</a> through the spring and summer of 2022.</p>
<p>However, these high prices belied the fact that U.S. domestic gasoline use <a href="https://fortune.com/2023/01/21/gasoline-demand-has-peaked-in-america-drivers-will-benefit-in-long-run/">has stopped growing</a>. Forecasts suggest that it will decline further in 2023 and beyond as the fuel economy of U.S. cars continues to improve and the number of electric vehicles on the road expands. </p>
<p>While energy prices were a burden, especially to lower-income households, European and American consumers have been able to ride out price surges driven by the war in Ukraine and have so far avoided actual outages and the worst recessionary fears. And their governments are offering <a href="https://theconversation.com/the-most-cost-effective-energy-efficiency-investments-you-can-make-and-how-the-new-inflation-reduction-act-could-help-188506">big economic incentives</a> to switch to <a href="https://www.bloomberg.com/news/articles/2022-09-03/who-s-better-at-climate-tech-incentives-us-or-europe?sref=Hjm5biAW">clean energy technologies</a> intended to reduce their nations’ need for fossil fuels.</p>
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<h2>Developing nations priced out</h2>
<p>The same can’t be said for consumers in developing nations like Pakistan, Bangladesh and India, who have experienced the energy cutoffs that were feared but didn’t occur in Europe. Notably, Europe’s intensive energy stockpiling in the summer of 2022 caused a <a href="https://www.bloomberg.com/news/articles/2022-06-24/pakistan-faces-deeper-power-crisis-as-lng-becomes-too-expensive?sref=Hjm5biAW">huge jump in global prices</a> for liquefied natural gas. In response, many utilities in less developed nations <a href="https://www.naturalgasintel.com/south-asia-buyers-again-sidelined-by-high-lng-spot-prices/">cut their natural gas purchases</a>, creating price-related electricity outages in some regions.</p>
<p>Faced with continuing high global energy prices, countries in the <a href="https://worldpopulationreview.com/country-rankings/global-south-countries">global south</a> – Africa, Asia and Latin America – have had to <a href="https://www.hindustantimes.com/world-news/europes-energy-crunch-eill-trigger-years-of-shortages-and-blackouts-101667874654951.html">reevaluate their dependence on foreign imports</a>. <a href="https://www.iea.org/news/global-coal-demand-is-set-to-return-to-its-all-time-high-in-2022">Increased use of coal</a> has made headlines, but renewable energy is starting to offer greater advantages, both because it is <a href="https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/">more affordable</a> and because governments can frame it as <a href="https://apnews.com/article/business-climate-and-environment-government-politics-60b7c65cca2c38c26a960d14732bb8bb">more secure and a source of domestic jobs</a>. </p>
<p>India, for example, is <a href="https://sites.tufts.edu/cierp/files/2022/09/CPL_PB2206_v5.pdf">doubling down on renewable energy</a>, unveiling plans to produce hydrogen fuel for heavy industry using renewable energy and moving away from imported LNG. Several African countries, such as Ethiopia, are <a href="https://www.brookings.edu/blog/africa-in-focus/2022/05/10/the-promise-of-african-clean-hydrogen-exports-potentials-and-pitfalls/">fast-tracking development of hydropower</a>.</p>
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<h2>Energy prices and climate justice</h2>
<p>The energy challenge that the Russia-Ukraine crisis has bred in developing countries has intensified global discussions about climate justice. One less examined impact of giant clean tech stimulus plans enacted in wealthy nations, such as the United States’ <a href="https://theconversation.com/the-most-cost-effective-energy-efficiency-investments-you-can-make-and-how-the-new-inflation-reduction-act-could-help-188506">Inflation Reduction Act</a>, is that they keep much of the available funding for climate finance at home. As a result, some developing country leaders worry that a clean energy technology knowledge gap <a href="https://www.brookings.edu/blog/africa-in-focus/2022/05/10/the-promise-of-african-clean-hydrogen-exports-potentials-and-pitfalls/">will widen, not shrink</a>, as the energy transition gains momentum. </p>
<p>Worsening the problem, members of the G-7 forum of wealthy nations have <a href="https://home.treasury.gov/news/press-releases/jy1016">tightened their monetary policies</a> to control war-driven inflation. This drives up the cost of debt and makes it harder for developing countries to borrow money to invest in clean energy. </p>
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<p>The U.S. is supporting a new approach called <a href="https://www.atlanticcouncil.org/blogs/energysource/just-energy-transition-partnerships-will-cop27-deliver-for-emerging-economies/">Just Energy Transition Partnerships</a>, in which wealthy nations provide funding to help developing countries shift away from coal-fired power plants, retrain workers and recruit private-sector investors to help finance decarbonization projects. But these solutions are negotiated bilaterally between individual countries, and the pace is slow. </p>
<p>When nations gather in the United Arab Emirates in late 2023 for the next round of global climate talks, wealthy nations – including Middle East oil producers – will face demands for new ways of financing energy security improvements in less wealthy countries. The world’s rich nations pledged in 2009 to direct $100 billion yearly to less wealthy nations by 2020 to help them adapt to climate change and decarbonize their economies, but <a href="https://theconversation.com/wealthy-countries-still-havent-met-their-100-billion-pledge-to-help-poor-countries-face-climate-change-and-the-risks-are-rising-173229">are far behind on fulfilling this promise</a>.</p>
<p>U.N. Secretary-General Antonio Guterres has called on developed nations to <a href="https://www.nbcnews.com/science/environment/un-secretary-general-says-polluters-must-pay-calls-extra-tax-fossil-fu-rcna48648">tax fossil fuel companies</a>, which reported record profits in 2022, and use the money to fund climate adaptation in low-income countries. New solutions are needed, because without some kind of <a href="https://www.nature.com/articles/d41586-021-02846-3">major progress</a>, wealthy nations will continue outbidding developing nations for the energy resources that the world’s <a href="https://www.un.org/ohrlls/news/frontline-climate-crisis-worlds-most-vulnerable-nations-suffer-disproportionately">most vulnerable people</a> desperately need.</p><img src="https://counter.theconversation.com/content/199046/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amy Myers Jaffe receives funding from U.S. National Aeronautics and Space Administration. </span></em></p>Russia tried to weaponize energy to keep European nations from opposing its war in Ukraine, but the real pain from Putin’s actions and Western sanctions has been felt far from Europe.Amy Myers Jaffe, Director, Energy, Climate Justice, and Sustainability Lab, and Research Professor, New York UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1969862023-01-04T14:47:46Z2023-01-04T14:47:46ZGlobal economy 2023: how governments could make the energy crisis worse this year<figure><img src="https://images.theconversation.com/files/502813/original/file-20230102-22-ce3hqt.jpg?ixlib=rb-1.1.0&rect=35%2C62%2C5586%2C3880&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Energy price crisis.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/concept-energy-crisis-increasing-demand-electricity-2164901677">i am adventure / Shutterstock</a></span></figcaption></figure><p><em>This is the second instalment in our series on where the global economy is heading in 2023, which started with <a href="https://theconversation.com/global-economy-2023-why-central-banks-face-an-epic-battle-against-inflation-amid-political-obstacles-197088">this article</a> on global inflation.</em></p>
<p>As 2022 drew to a close, EU energy ministers finally reached an agreement <a href="https://www.reuters.com/business/energy/eu-countries-make-final-push-gas-price-cap-deal-this-year-2022-12-19/">to cap gas prices</a> at €180 (£159) per megawatt hour (MWh) following months of volatility that piled pressure on European businesses and households. </p>
<p>The cap, according to EU policymakers, is an attempt to control the unruly market forces that saw <a href="https://www.bbc.co.uk/news/business-64032130">gas prices spike to nearly €340/MWh</a> last summer, driving electricity prices close to a record €1,000/MWh. But by winter, <a href="https://www.reuters.com/business/energy/europes-gas-stocks-comfortable-despite-cold-snap-kemp-2022-12-14/">Europe had enough gas in storage</a> for the season and was enjoying increasing imports of liquefied natural gas (LNG) through new floating regasification terminals in Germany and Holland.</p>
<p>While this government intervention might create the impression that the energy crisis caused by Russia’s February 2022 <a href="https://www.weforum.org/agenda/2022/11/russia-ukraine-invasion-global-energy-crisis/">invasion of Ukraine</a> is finally in the rear view mirror, it’s not. The recent gas price cap set by EU policymakers was set <a href="https://www.theice.com/products/27996665/Dutch-TTF-Gas-Futures/data?marketId=5477499">well over key LNG prices and the cost of gas</a> bought ahead of time on the futures market for delivery this winter, which is currently trading around €70/MWh. </p>
<p>This matters because suppliers often hedge their price risk in the futures markets and so the cap will introduce uncertainty as the hedges may not reflect real market movements. This could lead to more price volatility.</p>
<p>In fact, it was the high gas prices in 2022 that actually kept the lights on in the UK and Europe this winter. China’s strict zero-COVID policy considerably slowed the country’s demand for energy in 2022. </p>
<p>This meant that more gas supplies from the US, west Africa, Qatar and even Australia headed for Europe, where both demand and prices were higher. Indeed, Europe might have lost about 70 billion cubic meters (bcm) of Russian gas supply in 2022, <a href="https://www.oxfordenergy.org/publications/quarterly-gas-review-issue-19/">but it gained</a> over 50bcm of additional LNG imports.</p>
<p>This shows how markets can work to solve problems. Next winter, however, a perfect storm of unfavourable weather and a resurgence of Chinese energy demand could make prices even higher and more volatile for all gas and power users. </p>
<p>If so, energy users may not only have to worry about Putin and extreme weather events in 2023, but also about increasingly assertive government policies potentially causing energy shortages. </p>
<h2>Better energy crisis solutions</h2>
<p>By meddling with markets, the politicians that set these caps risk repeating mistakes made by the US during the 1970s oil price shocks. Attempts to control energy cost increases by Richard Nixon – who was hoping for reelection as US president in 1972 – with price freezes, discouraged the usual stockpiling of seasonal petroleum products in the US. This led to <a href="https://energyhistory.yale.edu/units/oil-shocks-1970s">shortages and misery</a> for the American people. </p>
<p>With increasing government intervention in markets, such shortages could happen again in regions such as Europe. Subsidies, retail price caps and tax reductions are being applied across the world in order to shelter consumers from high energy prices. </p>
<p>But such actions only really support the rich (<a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1018725/efus-Household-Energy-Consumption-Affordability.pdf">who consume disproportionately more energy</a>) and support the continued use of damaging fossil fuels. This is bad news for innovators looking for better and cleaner ways to produce energy. It also subsidises the Russian war in Ukraine. </p>
<p>By attempting to shield consumers from high prices, governments will only encourage consumption via lower prices, prolonging the energy crisis. Targeted money transfers to the households in need would be less costly for governments and would also allow the market to do its job of rationing energy. </p>
<figure class="align-center ">
<img alt="Hand refilling the car with fuel." src="https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=440&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=440&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=440&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=553&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=553&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502815/original/file-20230102-18-i91ujr.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=553&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Rising oil prices feed into the cost of petrol.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/hand-refilling-car-fuel-155233571">hxdbzxy / Shutterstock</a></span>
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<h2>The outlook for oil</h2>
<p>The oil market will be a very different story in 2023. The EU’s <a href="https://www.consilium.europa.eu/en/press/press-releases/2022/12/03/russian-oil-eu-agrees-on-level-of-price-cap/">Russian oil sanctions</a> came into effect on December 5 2022 for crude and will start on February 5 2023 for petroleum products. </p>
<p>This plan had a very good chance of hurting the Putin regime until the G7 countries set the cap at US$60 (£50) per barrel. Since this is <a href="https://foreignpolicy.com/2022/12/15/russia-ukraine-war-sanctions-oil-embargo-price-cap-putin-revenue-energy/">above the going price for Russian oil</a>, it makes the sanctions redundant. </p>
<p>Oil is a homogeneous commodity, mainly traded via ships and so virtually impossible to sanction globally. Supplies outside Opec are <a href="https://www.icis.com/explore/resources/news/2022/12/13/10835180/us-to-drive-2023-non-opec-crude-supply-growth/https://www.icis.com/explore/resources/news/2022/12/13/10835180/us-to-drive-2023-non-opec-crude-supply-growth/">plentiful and growing</a> and the fear of recession and poor Chinese demand have stopped prices from rising too rapidly in recent months. This means the short-term outlook is for lower oil prices, with likely increases coming only later in 2023.</p>
<p>But even the mighty global oil market has been affected by the long arm of government policy. In addition to the G7 sanctions, the Biden administration started releasing oil from the US Strategic Petroleum Reserve before the mid-term elections last November. </p>
<p>This was to keep domestic gas prices low – <a href="https://abcnews.go.com/Business/gas-prices-decide-midterms/story?id=92057805">an established US vote-winner</a> – but this additional supply also kept international prices low. As the price of US crude fell towards US$80 a barrel in the past month, the administration started filling its reserves again. </p>
<p>As a result, the US government has effectively become a trader and a swing producer in the oil market, giving it the power to affect prices. We can expect another turbulent year in energy markets in 2023, but such government actions and their consequences may turn out to be the biggest factor moving markets.</p>
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<img alt="" src="https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/502930/original/file-20230103-20-riy0if.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em>This article is part of <a href="https://theconversation.com/topics/global-economy-2023-132115">Global Economy 2023</a>, our series about the challenges facing the world in the year ahead. You might also like our Global Economy Newsletter, which you can <a href="https://theconversation.com/uk/newsletters/global-economy-and-business-115?utm_source=Global+Economy&utm_medium=linkback&utm_campaign=2023">subscribe to here</a>.</em></p><img src="https://counter.theconversation.com/content/196986/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adi Imsirovic does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Government attempts to manage energy prices could actually create more volatility in oil and gas markets.Adi Imsirovic, Senior Research Fellow, Oxford Institute for Energy Studies, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1912482022-10-18T20:09:41Z2022-10-18T20:09:41ZSanctions on Russia are increasing, not decreasing, its revenue<figure><img src="https://images.theconversation.com/files/490461/original/file-20221018-18-c9mlap.jpg?ixlib=rb-1.1.0&rect=0%2C366%2C4815%2C3386&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gas prices are displayed at a gas station in Frankfurt, Germany. OPEC countries have decided to cut oil production by 2 million barrels per day in response to rising global interest rates.</span> <span class="attribution"><span class="source">(AP Photo/Michael Probst)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/sanctions-on-russia-are-increasing--not-decreasing--its-revenue" width="100%" height="400"></iframe>
<p>The European Union has just <a href="https://www.reuters.com/world/europe/eu-set-reach-agreement-new-sanctions-proposal-wednesday-borrell-2022-10-05/">approved new sanctions against Russia</a>, including a price cap on oil sales, following the United States’ Sept. 30 announcement of new economic sanctions. Both announcements are in response to <a href="https://www.cbc.ca/news/world/russia-law-annex-ukraine-regions-war-1.6606535">Russia’s annexation of four regions of Ukraine</a>. </p>
<p>The <a href="https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/sanctions-against-russia-explained/">goal of sanctions against Russia</a> is to cripple Russia’s capacity to wage war and reduce Vladimir Putin’s access to the materials and financing necessary to fight. </p>
<p>However, because there are still countries willing to purchase Russia’s petroleum products, <a href="https://cdn.theconversation.com/static_files/files/2353/Russia's_Urals_price_figure.pdf?1665691011">sanctions are increasing Russia’s revenue, not decreasing it</a>.</p>
<p>Worse yet, the sanctions are driving up global oil and natural gas prices, causing spikes in inflation worldwide and, ironically, reducing the world’s access to <a href="https://www.energypolicy.columbia.edu/research/commentary/supply-critical-minerals-amid-russia-ukraine-war-and-possible-sanctions">the metals</a> <a href="https://pubs.usgs.gov/periodicals/mcs2022/mcs2022-cobalt.pdf">and minerals</a> <a href="https://www.bloomberg.com/news/articles/2022-03-05/russia-energy-chaos-triggers-the-biggest-market-shock-in-decades">necessary for the transition away from oil and natural gas</a>.</p>
<h2>Widespread impact from sanctions</h2>
<p>In early March, the sanctions on Russia’s oil sector had driven <a href="https://www.goldmansachs.com/insights/pages/squaring-russias-missing-barrels.html">oil price estimates up to US$185 per barrel</a> and the price of natural gas in Europe <a href="https://www.energypolicy.columbia.edu/sites/default/files/file-uploads/OilPrices+Sanctions_CGEP_Commentary_033122-4.pdf">nearly reached US$500 per barrel</a>. In late August, the price of natural gas lowered to <a href="https://oilprice.com/Energy/Natural-Gas/Europes-Gas-Price-Is-Now-Equivalent-To-410-Per-Barrel-Of-Oil.html">US$410 per barrel</a>. </p>
<p>As the winter approaches, <a href="https://www.energypolicy.columbia.edu/columbia-global-energy-summit-2022?utm_source=2022+Columbia+Global+Energy+Summit+Survey&utm_campaign=e457f27c13-EMAIL_CAMPAIGN_2020_07_15_01_21_COPY_01&utm_medium=email&utm_term=0_e73da6f2bb-e457f27c13-102626725">Anne-Sophie Corbeau</a>, Global Research Scholar at the Center on Global Energy Policy of Columbia University, stated that current natural gas prices of US$300 per barrel could generate not only a natural gas crisis, but also a power crisis. </p>
<p>This increase has had widespread effects beyond the oil and natural gas industry, impacting <a href="https://doi.org/10.1787/e01ac7be-en">agricultural products</a>, <a href="https://www.bloomberg.com/news/articles/2022-03-05/russia-energy-chaos-triggers-the-biggest-market-shock-in-decades">minerals and rare metals needed for green technologies</a>, <a href="https://doi.org/10.1787/dc825602-en">manufacturing industries</a> and <a href="https://doi.org/10.1787/e01ac7be-en">fertilizer production</a>.</p>
<p>There’s concern that the monetary policies implemented to contain those inflationary effects could <a href="https://oecd-development-matters.org/2022/04/28/collateral-damage-the-russia-ukraine-conflict-and-energy-transitions-in-least-developed-countries/">squeeze the amount of money and assistance</a> that have been previously directed to green energy investments. </p>
<p>Another concern is that some countries will <a href="https://www.ief.org/news/energy-market-impacts-of-russias-invasion-of-ukraine">revise their short- and long-term energy security policies</a>, putting energy security before energy transition. </p>
<h2>Sanction picking is ineffective</h2>
<p>Unlike previous “one-size-fits-all” sanctions on Iran and Venezuela, countries boycotting Russia are <a href="https://www.energypolicy.columbia.edu/sites/default/files/file-uploads/OilPrices+Sanctions_CGEP_Commentary_033122-4.pdf">only picking the restrictions they can afford</a>. All major oil importers will need to reject Russia’s oil exports for the sanctions to be effective, <a href="https://www.crystolenergy.com/the-crude-reality-of-oil-trade/">but so far this has not happened</a>. </p>
<p>Christof Rühl, a senior research scholar at Columbia University, has described this “sanction-picking” as a reckless gamble. He’s warned that energy sanctions will backfire, causing oil prices to surge, which will be economically detrimental to sanctioning countries. </p>
<p>The perception that sanctions on Russia’s oil will economically restrain Russia <a href="https://www.crystolenergy.com/the-crude-reality-of-oil-trade">does not account for the dynamics of the global oil market</a>. The <a href="https://www.ft.com/content/0738a816-cb3c-44f9-9257-7a8489bf4c9c">U.S. Treasury Secretary cautioned Europe against imposing full sanctions on Russia’s energy exports</a>, warning that it could result in elevated oil prices that would benefit Russia but be detrimental to the global economy. </p>
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<img alt="An elderly woman in a blazer speaking into a microphone from behind a podium" src="https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/490148/original/file-20221017-25-agz52n.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">U.S. Treasury Secretary Janet Yellen speaks after touring the IRS New Carrollton Federal Building in September 2022 in Lanham, Maryland.</span>
<span class="attribution"><span class="source">(AP Photo/Alex Brandon)</span></span>
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<p>Although Russia’s crude oil has been sold at a discount this year, the price is still higher than before the pandemic. This means Russia is still making more than the <a href="https://econpapers.repec.org/bookchap/sprsprchp/978-3-030-79713-3_5f11.htm">minimum price needed to finance its government budget</a> and international financial obligations.</p>
<p>There is also the issue of Russian oil being traded under the radar. This could result in the emergence of three distinct groups: countries that are willing to trade with Russia, countries that are energy-independent of Russia and countries that are not energy secure and must take a neutral position. This would support further sanction-picking and <a href="https://unsdg.un.org/latest/announcements/countries-bound-cop27-must-make-climate-action-top-global-priority-un-chief">set us back from our global energy security and transition goals</a>.</p>
<h2>Reorienting international trade</h2>
<p>Despite the sanctions, <a href="https://www.freightwaves.com/news/russian-oil-exports-still-booming-eu-still-reliant-on-russia">Russia’s exports are still flowing into the global economy</a>. This is because although trading firms have ceased new business with Russia, they continue to <a href="https://www.bnnbloomberg.ca/ukraine-urges-commodity-traders-to-stop-buying-russian-oil-1.1750710">honour their contracts from before the conflict</a>. Those contracts <a href="https://www.reuters.com/business/energy/commodities-trading-houses-help-keep-russian-oil-flowing-2022-03-25/">give trading firms the flexibility to purchase as much oil as they can every month</a>.</p>
<p><a href="https://www.bakerinstitute.org/media/files/files/5090f474/wp-ukrainerussiaoil-030822.pdf">Although some of Russia’s exports will be lost, export flows are likely to change</a>. Some of Russia’s crude oil intended for Europe will be <a href="https://www.csis.org/analysis/sanctions-drive-russian-oil-shadows">redirected to Asia because of the EU’s reluctance to purchase Russia’s oil</a>. Refineries, <a href="https://www.bloomberg.com/news/articles/2022-03-24/china-is-quietly-taking-cheap-russian-crude-as-india-buys-more">particularly in China and India</a>, are still willing to buy discounted Russian oil. </p>
<p>To wean itself off Russian exports, <a href="https://www.bakerinstitute.org/media/files/files/5090f474/wp-ukrainerussiaoil-030822.pdf">Europe is seeking to replace Russian petroleum imports</a> with supplies from the Middle East and Asia to the extent that their contractual commitments, refining configuration and import capacity permit. One outcome of this trade reshuffling is that <a href="https://www.crystolenergy.com/the-crude-reality-of-oil-trade">diesel prices in Europe will increase due to higher transportation costs</a>.</p>
<figure class="align-center ">
<img alt="A man in a blue and yellow polo shirt fills a car with gas at a gas station" src="https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=513&fit=crop&dpr=1 754w, https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=513&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/490458/original/file-20221018-14-wrdx92.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=513&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">An employee fills petrol in a vehicle in Mumbai, India, in June 2022. India is still a vital source of oil revenue for Moscow as the U.S. and other Western countries cut their energy imports from Russia.</span>
<span class="attribution"><span class="source">(AP Photo/Rajanish kakade)</span></span>
</figcaption>
</figure>
<h2>Russia is resilient against sanctions</h2>
<p>While <a href="https://twitter.com/ntsafos/status/1500636596420243457">some experts have argued that imposing sanctions on Russia’s oil sector</a>, rather than their gas sector, will be more effective, this isn’t the case. The argument that oil is Russia’s biggest source of income is not supported by <a href="https://cdn.theconversation.com/static_files/files/2354/GDP_Share.pdf?1665698079">data on Russia’s GDP</a> <a href="https://cdn.theconversation.com/static_files/files/2355/Federal_Government_Revenue_figure_v2.pdf?1665698133">and government revenue</a>.</p>
<p><a href="https://cdn.theconversation.com/static_files/files/2356/Crude_Oil_and_Refined_Products_Share_of_Russia's_Total_Goods_and_Services_Exports_figure.pdf?1665698323">Russia’s crude oil and refined products exports markets are well diversified.</a> The World Bank concentration index indicates that <a href="https://tcdata360.worldbank.org/indicators/conc.dvsct.idx.ex?country=RUS&indicator=3000&countries=SAU,USA&viz=bar_chart&years=2020&indicators=944">Russia’s economy was relatively diversified in 2020, with a 0.26 concentration index</a>. To put that in context, Saudi Arabia was in the top 20 per cent of least diversified economies with a 0.55 concentration index.</p>
<p>Russia has also <a href="https://econpapers.repec.org/bookchap/sprsprchp/978-3-030-79713-3_5f11.htm">shifted away from western markets, toward the Chinese market,</a> since <a href="https://cdn.theconversation.com/static_files/files/2357/Share_of_Russia's_Total_Crude_Oil_Exports_Proceeds_%28Value_of_Exports%29__Top_8_Countries_fig.pdf?1665698355">the imposition of sanctions in 2014</a> <a href="https://www.consilium.europa.eu/en/policies/sanctions/restrictive-measures-against-russia-over-ukraine/">following its annexation of Crimea</a>. </p>
<p>This <a href="https://cdn.theconversation.com/static_files/files/2358/Share_of_Russia's_Total_Refined_Products_Exports_Proceeds_%28Value_of_Exports%29_%E2%80%93_Top_9_Countries_fig.pdf?1665698383">diversification away from the West</a> means that imposing sanctions on Russia’s oil sector will have limited effects on Russia’s economy. </p>
<h2>What can be done?</h2>
<p>The sanctions against Russia are strangling an important international source of energy, critical metals and minerals, causing non-renewable and green energy shortages, and driving up inflation. Given the role Russia plays in energy supply, the global economy <a href="https://www.goldmansachs.com/insights/pages/squaring-russias-missing-barrels.html">could soon be faced with one of the largest energy supply shocks ever</a>.</p>
<p>Ultimately, the impact of oil sanctions on Russia is limited, while repercussions on the global economy and countries’ <a href="https://foreignpolicy.com/2022/07/22/global-energy-crisis-natural-gas-fuel-shortage-power-cut/">abilities to achieve energy security</a> and transition are severe. </p>
<p>As Nikos Tsafos, the previous energy chair at the Center for Strategic and International Studies <a href="https://www.csis.org/analysis/energy-weapon%E2%80%94revisited">wrote in March</a>: </p>
<blockquote>
<p>“A weapon is most useful when aimed at something — it is not clear what the western weaponization of energy exports is meant to accomplish exactly.”</p>
</blockquote>
<p>It is time to evaluate the economic costs of the sanctions on the world and on Russia. <a href="https://www.weforum.org/agenda/2022/07/inflation-cost-of-living-economics-ipsos-survey-july-2022/">Polls show inflation is the most pressing issue</a> for the public in many countries. There is room for political leaders to make the case that some sanctions are not working and should be changed.</p><img src="https://counter.theconversation.com/content/191248/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Brian McQuinn receives funding from SSHRC.</span></em></p><p class="fine-print"><em><span>Noha Razek does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The impact of oil sanctions on Russia is limited compared to the severe repercussions they have on the global economy and other countries’ abilities to achieve energy security and transition.Noha Razek, Assistant Professor of Economics, University of ReginaBrian McQuinn, Co-Director of the Centre for Artificial Intelligence, Data, and Conflict and Assistant Professor, International Studies, University of ReginaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1911172022-10-04T12:22:32Z2022-10-04T12:22:32ZCapping Russia’s oil profits could keep oil flowing to global markets at a reasonable cost while slashing Putin’s war funding<p>The world as we know it <a href="https://www.npd.no/en/facts/publications/norwegian-continental-shelf/norwegian-continental-shelf-no1-2020/what-if-oil-disappeared-tomorrow/">cannot function without oil</a>, giving oil-producing countries an advantage economists call <a href="https://stats.oecd.org/glossary/detail.asp?ID=3256">market power</a>. Nations that produce oil are able to set the price, while countries that rely on oil have little choice but to buy it at prices determined by <a href="https://www.marketplace.org/2022/06/01/why-opec-might-decide-to-take-a-break-from-its-alliance-with-russia/">the seller</a>.</p>
<p>While this asymmetry in market power generally favors the seller, in response to the war in Ukraine, a group of global oil buyers are trying to leverage their economic purchasing power to weaken Russia’s strength as a major global oil producer. The <a href="https://www.csis.org/analysis/european-union-imposes-partial-ban-russian-oil">European Union</a> and the <a href="https://www.reuters.com/business/energy/us-prepared-move-alone-banning-russian-oil-imports-sources-2022-03-07/">United States</a> have both imposed bans on the purchase of Russian oil. In solidarity, other nations like <a href="https://economictimes.indiatimes.com/industry/energy/oil-gas/who-is-buying-russian-crude-oil-and-who-has-stopped/articleshow/91261839.cms?from=mdr">Australia and Canada</a> have also decided to not purchase Russian oil anymore. </p>
<p>Now, the G-7 countries – a group of democracies including the United States that try to coordinate global policy – <a href="https://www.international.gc.ca/world-monde/international_relations-relations_internationales/g7/index.aspx?lang=eng">are developing</a> a price cap they hope nations will agree to when paying for Russian oil to further limit Russia’s profits and shrink the income stream that fuels its war with Ukraine. Can a price cap make a difference? And if so, how?</p>
<h2>Oil as an economic engine</h2>
<p>Given that it is <a href="https://www.credit-suisse.com/about-us-news/en/articles/news-and-expertise/can-the-world-run-without-oil-201604.html">not possible</a> for the world to completely wean itself off Russian oil, the <a href="https://www.international.gc.ca/world-monde/international_relations-relations_internationales/g7/index.aspx?lang=eng">G-7 recently announced</a> that it is planning to <a href="https://www.reuters.com/business/energy/g7s-price-cap-russian-oil-begins-take-shape-2022-09-12/">cap the price</a> of Russian oil beginning in December 2022. Its goal is to get <a href="https://www.reuters.com/business/energy/g7s-price-cap-russian-oil-begins-take-shape-2022-09-12/">more nations to join</a> the G-7 price cap scheme. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Tankers in the foreground of an industrial landscape. Billowing emissions from smokestacks rise in the air." src="https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486896/original/file-20220927-13397-rw1bvt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">European Union sanctions will prohibit Russian oil exports from international shipping lanes and ports.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/photos/TUJud0AWAPI">Chris LeBoutillier for Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>The economics of a <a href="https://www.smartcapitalmind.com/what-is-a-price-cap.htm">price cap</a> can be quite straightforward. The escalating costs of an <a href="https://nypost.com/article/where-nyc-real-estate-rental-market-stands-right-now-housing-prices/">apartment in New York</a>, for example, demonstrate how rent control – a price cap policy – protects renters from the rising cost of housing. When the market rental price, which equates the demand for apartments with its supply, is <a href="https://www.entrepreneur.com/business-news/new-york-citys-ruthless-rental-market-is-still-terrible/433600">too high</a>, a price cap below the market rental rate ensures that the price of an apartment cannot legally be higher than the cap.</p>
<h2>Squeezing Russian oil profits</h2>
<p>Led by U.S. Treasury Secretary Janet Yellen, the G-7 nations in <a href="https://www.reuters.com/business/energy/yellen-discusses-price-cap-russian-oil-with-uks-zahawi-us-treasury-2022-07-27/">July 2022</a> decided to cap the price of oil sold by Russia, a policy that is planned to go into effect on <a href="https://www.bbc.com/news/business-62770283">Dec. 5</a>. Since this cap would be executed in an international setting with different rules and regulations and with nations whose interests are <a href="https://www.cfr.org/backgrounder/where-g7-headed">not always aligned</a>, the success of a price cap is not guaranteed. Even so, the <a href="https://www.americanbanker.com/news/g7-leaders-agree-to-set-price-cap-on-russian-oil">leaders of the G-7</a> agree that a cap policy is needed to decelerate, if not stop, the <a href="https://www.cnn.com/2022/09/13/europe/ukraine-advance-russia-war-analysis-intl-hnk-ml/index.html">Russian war machine</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man stands in a doorway of a residential building that has been bombed. Rubble blocks his way." src="https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=409&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=409&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=409&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=514&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=514&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486918/original/file-20220927-14-v6jklp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=514&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Shelling continued in the town of Toretsk in the Donetsk region in late September 2022 as Russia moved to annex portions of Ukraine.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/man-leaves-a-residential-building-partially-destroyed-by-news-photo/1243453921?adppopup=true">Anatolie Stepanov via Getty Images</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>In addition to ensuring Putin’s war funding is reduced, a cap may help preclude an even higher spike of oil prices. The European Union’s <a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2802">sixth sanctions package</a> is set to ban all Russian crude imports by sea – also set to begin Dec. 5, 2022 – and all refined oil products starting on Feb. 5, 2023. Because the world economy will have relatively little time to adjust to these hard cutoff dates, they are likely to lead to <a href="https://foreignpolicy.com/2022/09/06/russia-oil-price-cap-putin-war-sanctions-energy-g7-europe-crisis/">enormous oil price hikes</a> that could cause <a href="https://www.washingtonpost.com/world/2022/09/17/europe-russian-natural-gas-prices-firewood/">great suffering</a> in the European Union, the United States and other nations.</p>
<p>If capped <a href="https://www.nytimes.com/2022/09/16/business/russian-oil-price-cap.html">at the right level</a> – a little above Russia’s cost of producing oil, estimated at <a href="https://www.nytimes.com/2022/09/16/business/russian-oil-price-cap.html">US$40 per barrel</a> – and periodically monitored, then Russia will likely act in its own <a href="https://www.nytimes.com/2022/07/14/business/yellen-russia-oil-cap.html">interest and legally sell oil</a> at the capped price. Potential buyers would not run afoul of <a href="https://www.bbc.com/news/world-europe-60125659">Western sanctions</a> if oil is <a href="https://www.jdsupra.com/legalnews/ofac-issues-guidance-on-implementation-8632420/">purchased at the capped price</a>, helping to limit dramatic upticks in the price. This is how the price cap concept is supposed to work. Yet a few things could go wrong. </p>
<p>Chief among these is the behavior of nations that are not party to the G-7 cap. <a href="https://www.spglobal.com/commodityinsights/en/market-insights/blogs/oil/091322-fft-g7-price-cap-russia-oil">China and India</a>, for instance, could decide that they will pay no heed to the cap and simply <a href="https://www.cnbc.com/2022/09/05/india-says-it-will-look-carefully-at-russian-oil-price-cap.html">continue to do business</a> with Russia as they have in the recent past. </p>
<p>But economic forces are likely to make China and India behave <a href="https://foreignpolicy.com/2022/09/06/russia-oil-price-cap-putin-war-sanctions-energy-g7-europe-crisis/">consistent with the cap policy</a>. </p>
<p>Since oil can always be purchased at the capped price, China and India have an incentive to reduce their oil expenditures by obtaining <a href="https://markets.businessinsider.com/news/commodities/china-india-buy-price-cap-russia-cheap-crude-treasury-adeyemo-2022-9">even larger discounts</a> from Russia to continue to buy its oil. Since Russia is <a href="https://foreignpolicy.com/2022/09/06/russia-oil-price-cap-putin-war-sanctions-energy-g7-europe-crisis/">desperate to find markets</a> for its oil, to continue to do business in these large markets, President Vladimir Putin either has to sell his oil at the capped price or at a negotiated discount. Either way, the intention of the cap, to reduce oil revenues flowing to Putin, will be met. </p>
<p>Some nations might be able to undermine the cap because it would be <a href="https://www.newsweek.com/price-cap-russian-oilgood-theory-hard-practice-opinion-1739146">difficult to enforce</a>. Privately held companies in the business of shipping and financing Russian oil may continue to sell oil to buyers. Such entities, because of the risk of running afoul of Western sanctions, are likely to do so after demanding a cut from any oil sales, and this will, once again, have the impact of <a href="https://foreignpolicy.com/2022/09/06/russia-oil-price-cap-putin-war-sanctions-energy-g7-europe-crisis/">cutting into Putin’s profits</a>.</p>
<h2>Other forces may help maintain a cap</h2>
<p>Another consideration for businesses that ignore the cap is that 90% of <a href="https://www.fxleaders.com/news/2022/09/05/can-the-g7-price-cap-on-russian-oil-raise-prices/">maritime insurance</a> is based in Britain and the EU. Such firms will not be able to do legal business with Russian entities or those promoting its interests as determined by the international cap enforcement criteria. Based on <a href="https://scholar.google.com/citations?user=x5dB33oAAAAJ&hl=en">my research</a>, I <a href="https://www.nytimes.com/2022/03/01/business/energy-environment/russia-oil-price.html">believe </a> that not many buyers will continue to do business with Russia when most seaports, <a href="https://www.eagexpress.com/blog/2019/7/18/what-are-shipping-lanes">ocean shipping lanes</a> and oil tankers are off-limits to Russian oil because of the terms stipulated in the European Union’s <a href="https://ec.europa.eu/commission/presscorner/detail/en/IP_22_2802">sixth sanctions package</a>.</p>
<p>Putin claims that he <a href="https://www.reuters.com/business/energy/russia-says-it-will-stop-selling-oil-countries-that-impose-price-caps-2022-09-02/">will not sell Russian oil</a> to nations participating in the cap program. Based on my research, this is difficult to believe given how <a href="https://dergipark.org.tr/en/download/article-file/361784">dependent the Russian economy is</a> on oil revenue. </p>
<p>Russia’s economy is in <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4167193">poor shape</a>. By one measure, its war with Ukraine is costing about <a href="https://www.israelhayom.com/2022/08/22/moscow-is-having-a-hard-time-facing-the-costs-of-the-ukraine-war/">$1 billion per day</a>. Such high costs, in concert with Western sanctions, will continue to have an adverse impact on Russia’s economy. To continue his “<a href="https://www.reuters.com/world/europe/russias-putin-authorises-military-operations-donbass-domestic-media-2022-02-24/">special military operation</a>” in Ukraine, Putin urgently <a href="https://www.journalofdemocracy.org/how-putins-war-in-ukraine-has-ruined-russia/">needs more revenue</a>.</p>
<p>Oil sales are Russia’s <a href="https://www.iea.org/articles/energy-fact-sheet-why-does-russian-oil-and-gas-matter">principal revenue source</a>. Perhaps the price cap will pressure Russia to choose <a href="https://www.nytimes.com/2022/09/16/business/russian-oil-price-cap.html">selling oil</a> over waging war.</p><img src="https://counter.theconversation.com/content/191117/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Amitrajeet A. Batabyal does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A G-7 strategy to cap Russia’s oil prices and continue to weaken that economy is intended to halt the war in Ukraine. Could it work?Amitrajeet A. Batabyal, Distinguished Professor, Arthur J. Gosnell Professor of Economics, & Interim Head, Department of Sustainability, Rochester Institute of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1912952022-09-29T14:07:13Z2022-09-29T14:07:13ZGreen hydrogen sounds like a win for developing countries. But cost and transport are problems<figure><img src="https://images.theconversation.com/files/486469/original/file-20220926-879-upyevo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p><em>Hydrogen is used mainly to make chemicals such as fertiliser, and in oil refineries. Most hydrogen in the world today is made from natural gas or coal – methods associated with large carbon dioxide emissions. Developed countries are therefore looking to “green hydrogen” instead – produced using renewable electricity such as solar and wind power. Energy experts Rod Crompton and Bruce Young explain green hydrogen’s potential benefits and challenges.</em></p>
<h2>What is hydrogen used for?</h2>
<p>Global hydrogen demand reached 94 million tons in 2021, and contained energy equal to about <a href="https://www.iea.org/reports/global-hydrogen-review-2022/executive-summary">2.5% of global final energy consumption</a>. Only about <a href="https://www.weforum.org/agenda/2021/06/4-technologies-accelerating-green-hydrogen-revolution/#:%7E:text=Green%20hydrogen%20is%20produced%20through,0.1%25%20of%20global%20hydrogen%20production">0.1%</a> of current global hydrogen production is green, but big expansions are planned. </p>
<p>New applications for green hydrogen are also envisaged.</p>
<p><a href="https://www.linkedin.com/pulse/clean-hydrogen-ladder-v40-michael-liebreich/">Liebreich’s classification</a> is a useful indicator of the potential markets for green hydrogen. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=327&fit=crop&dpr=1 754w, https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=327&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/486287/original/file-20220923-214-qehx50.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=327&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Reproduced with permission from Liebreich Associates.</span>
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</figure>
<p>Since the objective of using green hydrogen is really to reduce carbon dioxide, the applications to target first should be those that will yield the largest reductions in emissions. Liebreich’s ladder shows which they are. The applications in the (green) top row are an efficient use of valuable green hydrogen. </p>
<p>But green hydrogen currently costs much more to make than less clean types of hydrogen. Using it to produce the <a href="https://royalsociety.org/-/media/policy/projects/green-ammonia/green-ammonia-policy-briefing.pdf">180 million tons</a> per annum of ammonia required globally for fertiliser production would have a severe knock-on effect on food prices. </p>
<p>So it is difficult to see how this transition is going to occur.</p>
<h2>How is green hydrogen made?</h2>
<p>Green hydrogen is made from water. Using renewable (“green”) electricity, equipment called electrolysers separates the hydrogen from oxygen in water (H₂O). The process is called electrolysis. </p>
<p>Green hydrogen production emits no carbon dioxide, but the construction of renewable electricity infrastructure currently uses fossil fuels, which do emit carbon dioxide. </p>
<p>Hydrogen has traditionally been made from non-renewable energy sources like coal (“black hydrogen”) and natural gas (“<a href="https://energy-cities.eu/50-shades-of-grey-and-blue-and-green-hydrogen/#:%7E:text=Grey%20hydrogen%20accounts%20for%20most,per%20kg%20of%20hydrogen%20production">grey hydrogen</a>”). When these methods are combined with carbon capture and storage, the hydrogen produced is known as “blue hydrogen”. </p>
<h2>What challenges does green hydrogen present?</h2>
<p>Although the <a href="https://www.irena.org/publications/2021/Jun/Renewable-Power-Costs-in-2020">costs of renewable power generation</a> have been coming down, the cost of electrolysis is still not commercially competitive. </p>
<p>Today, green hydrogen has an estimated energy equivalent cost of between US$250 and US$400 per barrel of oil at the factory gate, according to the <a href="https://www.irena.org/publications/2020/Dec/Green-hydrogen-cost-reduction">International Renewable Energy Agency</a>. Future cost reductions are forecast but these are uncertain. Current oil prices are around $100 a barrel – much less than it would cost to use green hydrogen instead of conventional petroleum products. </p>
<p>The costs of transporting hydrogen must be taken into account too. </p>
<p>Unfortunately, the physics of hydrogen is against low-cost hydrogen transport. It is much more challenging than oil-based liquid fuels, liquefied petroleum gas or liquefied natural gas. Ocean transport of hydrogen has to be at very low temperatures (-253°C). Petrol or diesel doesn’t need costly refrigeration: it is transported at ambient air temperature. </p>
<p>And hydrogen carries only 25% of the energy that a litre of petrol does, making it much more expensive to transport and store the same amount of energy. </p>
<p>Alternative ways to transport hydrogen have been investigated. Because ammonia (NH₃) is much easier and cheaper to transport than hydrogen, the International Renewable Energy Agency has recommended “storing” hydrogen in ammonia for shipping. But that requires additional equipment to put the hydrogen into ammonia and strip it out at its destination. These processes add costs of about US$2.50-US$4.20/kg (equivalent to US$123-US$207 per barrel of oil) according to <a href="https://www.irena.org/publications/2022/Apr/Global-hydrogen-trade-Part-II">the agency</a>. </p>
<p>Hydrogen is more difficult to handle than conventional fossil fuels. It is a colourless, odourless and tasteless gas, unlike conventional hydrocarbons. This makes leak detection more difficult and increases the risk of fire or explosion. Hydrogen fires are invisible to the human eye. </p>
<p>Historically, hydrogen has been controlled within factory perimeters and managed by trained people. The widespread introduction of hydrogen into society will require new measures and skills, including insurance, materials handling, firefighting and disaster management.</p>
<h2>Where are the first hydrogen mega projects likely to be built?</h2>
<p>Construction of the first <a href="https://acwapower.com/en/projects/neom-green-hydrogen-project/">gigawatt scale green hydrogen project</a> in Saudi Arabia has already started. Many of the pioneering projects will be built in the southern hemisphere, mostly in developing countries. This is because they are less densely populated and have better renewable energy resources (solar and wind) for generating the necessary electricity. </p>
<p>Although this may sound positive for developing countries, there are big risks in developing hydrogen mega projects. For one thing, the “iron law” of <a href="https://www.researchgate.net/publication/299393235_Introduction_The_Iron_Law_of_Megaproject_Management">megaprojects</a> states: “Over budget, over time, under benefits, over and over again”. Project owners bear the project execution risk.</p>
<p>Risks also include exchange rate risk, remote locations, pioneering technology, and a lack of skills. Prospective host countries will have to balance these risks against the temptations of improved investment, employment and balance of payments. They would be wise to extract guarantees from their customer countries so as to avoid the injustice of the global south subsidising the global north as it transitions to cleaner energy.</p>
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Read more:
<a href="https://theconversation.com/south-africa-has-huge-green-fuels-potential-but-it-needs-to-act-now-129009">South Africa has huge 'green fuels' potential. But it needs to act now</a>
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<p>South Africa now has a “<a href="https://www.dst.gov.za/images/South_African_Hydrogen_Society_RoadmapV1.pdf">Hydrogen Roadmap</a>” after many years of government funding. There is talk by the energy company Sasol and vehicle manufacturer Toyota of a “<a href="https://www.dst.gov.za/images/2021/Hydrogen_Valley_Feasibility_Study_Report_Final_Version.pdf">Hydrogen Valley</a>”, a geographical corridor of concentrated hydrogen manufacture and application industries. And the South African government and Sasol are talking of establishing a new port on the west coast at <a href="https://www.engineeringnews.co.za/article/stakeholders-to-visit-boegebaai-to-kickstart-green-hydrogen-project-2022-01-14">Boegoebaai</a> for the manufacture and export of green hydrogen. In Nelson Mandela Bay, Hive Hydrogen is planning a US$4.6 billion <a href="https://www.engineeringnews.co.za/print-version/worlds-largest-green-ammonia-export-plant-for-nelson-mandela-bay-2021-12-15">green ammonia plant</a>. </p>
<p>Namibia also has big <a href="https://www.engineeringnews.co.za/article/namibian-green-hydrogen-developer-expects-implementation-agreement-on-10bn-project-by-year-end-2022-08-18#:%7E:text=to%20Learn%20More-,Namibian%20green%20hydrogen%20developer%20expects%20implementation%20agreement,bn%20project%20by%20year%2Dend&text=Green%20hydrogen%20development%20company%20Hyphen,Namibian%20government%20by%20year%2Dend">plans</a> for a US$10 billion green hydrogen project. </p>
<p>The key to reducing green hydrogen costs in the future lies mainly in technological improvements and cost reductions related to mass manufacture and a scale-up in electrolysis. And to a lesser extent, incremental cost reductions in transport and handling.</p><img src="https://counter.theconversation.com/content/191295/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rod Crompton is a non-executive director at Eskom and SANEA.</span></em></p><p class="fine-print"><em><span>Bruce Douglas Young does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The key to reducing green hydrogen costs in the future lies mainly in technological improvements.Rod Crompton, Visiting Adjunct Professor, African Energy Leadership Centre, Wits Business School, University of the WitwatersrandBruce Douglas Young, Senior Lecturer, Africa Energy Leadership Centre, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1910812022-09-28T03:24:51Z2022-09-28T03:24:51ZWhat now for petrol prices? Global doom and gloom makes the outlook surprisingly positive<figure><img src="https://images.theconversation.com/files/486704/original/file-20220927-26-u9kuvv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>In early March Russia’s invasion of Ukraine pushed global oil prices up by about 30% and Australians faced paying more than $2.15 a litre for petrol. Contrary to <a href="https://theconversation.com/cut-emissions-not-petrol-tax-what-economists-want-from-the-budget-179837">economists’ advice</a>, the Morrison government decided to halve of the fuel excise for six months, reducing the cost of petrol by 22.1 cents a litre.</p>
<p>That discount period ends at midnight. So what can you expect local fuel prices to do now?</p>
<p>To begin with, the <a href="https://www.ato.gov.au/business/excise-on-fuel-and-petroleum-products/lodging,-paying-and-rates---excisable-fuel/excise-duty-rates-for-fuel-and-petroleum-products/">fuel excise is indexed</a> so it will add 23 cents to a litre of petrol. But not immediately. Your local service station’s tanks are likely to still hold fuel for which the retailer paid the discounted excise. </p>
<p>Federal treasurer Jim Chalmers has <a href="https://www.abc.net.au/news/2022-09-20/fuel-excise-shouldnt-cause-immediate-price-spike/101457614">cited industry estimates</a> of about 700 million litres of discounted fuel still being “in the system”. To put that in perspective, Australians consumed an average of about <a href="https://www.energy.gov.au/government-priorities/energy-data/australian-petroleum-statistics">42.5 million litres</a> of petrol a day in 2021. So it may be one to two weeks, depending on where you live, before you’re paying extra.</p>
<p>But what you will then be paying probably won’t be that different to before Russia invaded Ukraine, with global oil prices dropping due to efforts to increase supply and a deteriorating global economic outlook suppressing demand. </p>
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Read more:
<a href="https://theconversation.com/what-is-petrol-excise-and-why-does-australia-have-it-anyway-179373">What is petrol excise, and why does Australia have it anyway?</a>
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<h2>Global prices dictate local prices</h2>
<p>Australia imports about <a href="https://theconversation.com/conflict-in-the-south-china-sea-threatens-90-of-australias-fuel-imports-study-188148">90% of its refined fuel needs</a>, so the main determinants of the price of petrol and diesel in Australia are international oil prices and the value of Australian dollar to the US dollar (because oil prices are determined in US currency). </p>
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Read more:
<a href="https://theconversation.com/conflict-in-the-south-china-sea-threatens-90-of-australias-fuel-imports-study-188148">Conflict in the South China Sea threatens 90% of Australia's fuel imports: study</a>
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<p>Over the past six months the Australian dollar’s buying power has declined from about 75 to 65 US cents (a 13% drop). But that has been offset by oil prices falling more than 30% since June.</p>
<p>There is no single oil price because oil is traded in different markets according to its quality (with names reflecting the historical source of that type of oil). The following graph shows two commonly cited benchmarks – West Texas Intermediate (from Texas) and Brent Crude (from the North Sea). </p>
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<p><iframe id="UwnyX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/UwnyX/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
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<p>Prices spiked after the invasion of Ukraine due to Russia’s signicance as an oil exporter (the second-biggest after Saudi Arabia, accounting for about <a href="https://www.worldstopexports.com/worlds-top-oil-exports-country/">8% of exports in 2021</a>) and uncertainty about what the conflict would mean for those exports, as well as Russia’s gas exports to Europe and markets generally.</p>
<h2>Increased supply, faltering demand</h2>
<p>The steady decline since June is due to two main reasons. </p>
<p>First, the efforts of the European Union and the United States to increase non-Russian oil supplies. This has been both to ease inflationary pressures on their own economies as well as to drive down the windfall revenue Russia has made from its oil exports (mostly to <a href="https://oilprice.com/Energy/Energy-General/Global-Oil-Flows-Are-Changing-As-Russian-Crude-Moves-East.html">China and India</a>).</p>
<p>The G7 is working on a plan to further choke off those revenues through imposing <a href="https://www.brookings.edu/events/capping-the-price-of-russian-oil-will-it-happen-will-it-succeed/">a price cap</a> on Russian oil exports. Whether this will succeed depends first on finding <a href="https://www.bloomberg.com/news/articles/2022-09-26/eu-countries-plan-to-delay-russian-oil-price-cap-amid-divisions?leadSource=uverify%20wall">agreement in Europe</a>, which is divided over the plan. </p>
<p>The Australian government is <a href="https://indaily.com.au/news/2022/09/20/australia-to-back-g7-russian-oil-price-cap/">supporting the price cap</a> but this is mostly symbolic. At this point I can’t see it having much practical impact on Australian petrol prices.</p>
<p>Second, the global economy is weakening, which is taking the pressure off demand. The OECD’s economic outlook published this month predicts global economic growth will slow to <a href="https://www.oecd.org/economic-outlook/september-2022/#global-outlook">2.2% in 2023</a>.</p>
<p>As a consequence, the International Energy Agency’s <a href="https://www.iea.org/reports/oil-market-report-august-2022">Oil Market Report</a> last month revised upwards its outlook for world oil supply (though it also warned “another price rally cannot be excluded” given disruption risks). </p>
<p>Crude oil prices are now below US$90 a barrel – less than at the start of Russia’s invasion of Ukraine. For the next 12 months oil prices can be expected to decline to below US$80. This will put Australian petrol and diesel prices back to where they were in 2021. Which is good news for motorists, if not the global economy.</p><img src="https://counter.theconversation.com/content/191081/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Joaquin Vespignani does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With global oil prices falling, the end of the fuel excise discount will put Australian motorists back in familiar price territory.Joaquin Vespignani, Associate professor, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1893302022-08-29T00:47:38Z2022-08-29T00:47:38ZHave we seen the last of $2 petrol for a while?<figure><img src="https://images.theconversation.com/files/480983/original/file-20220825-20-j7142u.jpg?ixlib=rb-1.1.0&rect=0%2C114%2C5472%2C3522&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Erik Mclean/Unsplash</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Average fuel prices in Australian capital cities remain well below the peaks seen in March and June. <a href="https://www.drive.com.au/news/fuel-prices-today/">Recent data</a> reveal fuel is around 30-35 cents per litre lower than the highs of two months ago. As of last week, the average price of 95 octane unleaded across eight capitals stood at A$1.90 per litre.</p>
<p>The question on the minds of many motorists and businesses relying on road transport to deliver goods and services is: have we seen the last of $2 petrol for a while? </p>
<p>Given this year’s trends in international oil prices (<a href="https://theconversation.com/what-russias-war-means-for-australian-petrol-prices-2-10-a-litre-177719">a key component</a> of Australia’s petrol prices), the answer would be: “It depends on the fuel excise”.</p>
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<a href="https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/480987/original/file-20220825-24-dw2s7a.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">In March this year, as Russia’s invasion of Ukraine began to drive international oil prices up.</span>
<span class="attribution"><span class="source">Image by Markus Spiske from Pixabay</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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Read more:
<a href="https://theconversation.com/what-russias-war-means-for-australian-petrol-prices-2-10-a-litre-177719">What Russia's war means for Australian petrol prices: $2.10 a litre</a>
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<h2>A fuel excise cut after Russia invades Ukraine</h2>
<p>A <a href="https://www.accc.gov.au/consumers/petrol-diesel-lpg/about-fuel-prices#:%7E:text=On%2029%20March%202022%20the,per%20litre%20for%20automotive%20LPG.">fuel excise</a> is a tax on fuel levied by the Australian government. </p>
<p>In March this year, as Russia’s invasion of Ukraine began to drive international oil prices up, the previous federal government <a href="https://budget.gov.au/2022-23/content/factsheets/download/factsheet_excise_offpublicroads.pdf">announced</a> a 50% cut in fuel excise for six months. In other words, it would charge less tax on fuel until September (in an effort to soften the impact of soaring international oil prices on Australian consumers). After this decision, the cost of petrol reduced by 22 cents per litre.</p>
<p>While the general trend is downwards in recent months, crude oil <a href="https://www.marketwatch.com/investing/future/brn00?countrycode=uk">prices have ranged</a> between US$92 and US$123 per barrel – much higher than the norm in recent years.</p>
<p>With Australia’s <a href="https://theconversation.com/high-petrol-prices-hurt-but-cutting-excise-would-harm-energy-security-178766">halved fuel excise</a>, this price range translates to average 95 octane unleaded petrol prices across eight capitals of between A$1.90 and A$2.25 per litre. </p>
<p>Globally, crude oil is <a href="https://tradingeconomics.com/commodity/crude-oil">down about 25%</a> from the June high of US$123 per barrel. That’s in part due to growing fears a global economic slowdown would affect consumption, as central banks around the world raise interest rates to combat spiralling inflation.</p>
<p>The potential revival of a <a href="https://finance.yahoo.com/news/oil-prices-plummet-iran-nuclear-200000751.html">deal</a> between Iran and Western countries that could lead to more Iranian oil exports has also helped <a href="https://finance.yahoo.com/news/oil-prices-plummet-iran-nuclear-200000751.html">drive oil prices</a> down. This is generally good news for petrol prices in Australia.</p>
<h2>What next for the fuel excise in Australia?</h2>
<p>However, a lot will depend on what the Australian government does about the fuel excise.</p>
<p>It is uncertain whether the new government will extend the fuel excise cut brought in by their predecessors in March.</p>
<p>The excise cut is set to expire in September, right in the middle of a cost-of-living crisis in Australia.</p>
<p>In July, amid calls to extend the fuel excise, Treasurer Jim Chalmers said <a href="https://www.sbs.com.au/news/article/the-price-of-fuel-is-set-to-rise-heres-why-and-how-much-it-could-cost-you/w2v0xrwpm">an extension is not an option</a>:</p>
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<p>We’ve tried to be upfront with people and say they shouldn’t expect that petrol price relief to continue forever.</p>
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<p>According to the federal budget, the six-month excise cut has resulted in a <a href="https://theconversation.com/josh-frydenbergs-budget-is-an-extraordinary-turnaround-but-leaves-a-40-billion-problem-180123">A$3 billion hit</a> on the economy.</p>
<p>Recent news reports indicated the prime minister was “examining” a fuel excise cut <a href="https://www.crikey.com.au/2022/08/24/pm-examining-fuel-excise-cut-extension/">extension</a>, but remains adamant the cut is a temporary measure.</p>
<p>If the cut is not extended, average petrol prices in Australia will almost certainly return to the above $2 territory by early October.</p>
<p>However, the solution to Australians being held hostage to volatile global prices and geopolitical developments will not come from extending the fuel excise cut. </p>
<p>The solution will come from reducing demand for oil-based fuels through policies promoting local energy generation and switching to low-emissions vehicles.</p>
<h2>The longer-term outlook</h2>
<p>Over the longer term, there is hope oil and petrol prices will not affect the pockets of Australian motorists and the Australian economy to the same extent as they have earlier this year.</p>
<p>The new Australian government <a href="https://www.cnbc.com/2022/08/22/australian-bank-to-scrap-loans-for-new-diesel-and-gasoline-cars-.html">has acknowledged</a> the country is “significantly behind the pack when it comes to electric vehicles.” </p>
<p>Only 2% of cars sold in Australia are electric, <a href="https://www.iea.org/data-and-statistics/data-product/global-ev-outlook-2022">five times lower</a> than the global average.</p>
<p>The government recently released some detail on plans to set up a <a href="https://infrastructuremagazine.com.au/2022/08/22/australias-first-national-electric-vehicle-strategy/">National Electric Vehicle Strategy</a>, with a discussion paper on the matter due to be released soon for consultation.</p>
<p>At the heart of the strategy will be a plan to grow the Australian electric vehicle market, in a bid to improve uptake of electric vehicles and improve affordability and choice. </p>
<p>Australia is <a href="https://theconversation.com/the-road-to-new-fuel-efficiency-rules-is-filled-with-potholes-heres-how-australia-can-avoid-them-188814">the only OECD country</a> to not have, or be in the process of developing, mandatory fuel-efficiency standards for road transport vehicles. </p>
<p>The new government <a href="https://www.cnbc.com/2022/08/19/australia-plans-fuel-efficiency-standards-to-boost-electric-car-supply.html">will seek to introduce</a> vehicle fuel efficiency standards to help increase the supply of electric cars, improve affordability for motorists and drive down emissions.</p>
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Read more:
<a href="https://theconversation.com/high-petrol-prices-hurt-but-cutting-excise-would-harm-energy-security-178766">High petrol prices hurt, but cutting excise would harm energy security</a>
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<img src="https://counter.theconversation.com/content/189330/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vlado Vivoda does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>If the fuel excise cut is not extended, average petrol prices in Australia will almost certainly return to the above $2 territory by early October. But a different solution is needed.Vlado Vivoda, Honorary Fellow, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1887672022-08-16T10:14:04Z2022-08-16T10:14:04ZWhy are gas prices still high despite oil getting cheaper – and what will happen next? Energy expert Q&A<figure><img src="https://images.theconversation.com/files/479371/original/file-20220816-14-tb3u6a.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">While Putin reduces Russian gas supplies, Europe has become more dependent on shipments of LNG. </span> <span class="attribution"><a class="source" href="https://www.alamy.com/a-liquid-natural-gas-tanker-lng-in-japans-tokyo-bay-at-sunrise-image383809078.html?imageid=42917FA9-72A4-4608-80AE-1CB0DFBBA9EA&p=377368&pn=1&searchId=9f5d9624ee7d56757ebb50fe16ef7660&searchtype=0">Bill Chizek Photography/Alamy</a></span></figcaption></figure><p><em>While thermometers have been well into the red across the northern hemisphere, people are panicking about the cost of energy bills once winter starts to bite. According to the <a href="https://www.theguardian.com/money/2022/aug/09/uk-energy-bills-forecast-to-hit-4266-from-january">latest forecasts</a> in the UK, the minimum price cap for households’ electricity and heating costs is set to more than double over the winter.</em> </p>
<p><em>Other commentators <a href="https://www.telegraph.co.uk/business/2022/08/12/next-pm-should-not-bounced-stupid-energy-policies-mood-near/">have suggested</a> that these fears are being overdone, and that the weakening global economy and moves to fix energy supply issues will bring down prices. We asked energy expert Adi Imsirovic for his view on where things are heading.</em></p>
<h2>The price of oil has been falling recently – why?</h2>
<p>Energy prices don’t like two things: recessions and higher interest rates. At present, the prospects for the global economy are <a href="https://news.un.org/en/story/2022/07/1123342">getting gloomier</a> and <a href="https://www.global-rates.com/en/interest-rates/central-banks/central-banks.aspx">interest rates</a> are going up. </p>
<p>When interest rates are low, speculators can borrow money cheaply to make bets on energy prices going up, but this becomes less attractive as rates rise. Commodities also always have the disadvantage that you are not paid to hold them, unlike dividends on shares or interest payments on bonds. </p>
<p>The yields on these other assets tend to go up when interest rates rise, which makes commodities relatively less attractive to investors. Even compared to another commodity like gold, oil is much more expensive to store, so you are also paying a lot to hold the investment. </p>
<p><strong>Brent crude (US$/barrel)</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph of crude oil prices" src="https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479183/original/file-20220815-16-vgkvdr.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
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</figure>
<h2>Why has natural gas held up better than oil?</h2>
<p>Because oil can easily be sold elsewhere. If Europe doesn’t buy Russian oil, it can instead be shipped to Asia. It might be a different story when the <a href="https://theconversation.com/how-the-ukraine-war-is-benefiting-russian-insurers-and-pushing-up-insurance-premiums-everywhere-184965">European restrictions</a> on insuring ships carrying Russian exports come into force at the end of the year, but that’s for the future. </p>
<p>On the other hand, when Russia decides not to sell its gas to <a href="https://www.npr.org/2022/04/28/1095113387/what-russia-cutting-off-energy-to-poland-and-bulgaria-means-for-the-world?t=1660566563125">Bulgaria or Poland</a> or <a href="https://www.aljazeera.com/news/2022/5/21/russia-cuts-off-finland-gas-flows-over-payment-dispute">Finland</a>, the gas broadly either stays in the ground or gets burned in Russia. In effect, you are losing the supply to the world market, whereas the <a href="https://www.theguardian.com/world/2022/aug/11/russia-oil-production-sanctions-limited-effect-ukraine-war">overall drop</a> in oil exports from Russia during the war has been small. </p>
<p>Europe also doesn’t have many alternatives to Russian gas. It has to buy LNG (liquefied natural gas) from Asia on the spot market, bidding up the price shipment by shipment. </p>
<p>This is very visible to everyone else in the market and therefore increases the sense of panic. It’s a very similar situation to oil in 1979, during the Iran hostage crisis, when majors like BP had too little to fulfil supply contracts and had to go to the spot market and bid for barrels. </p>
<h2>What will determine what happens next to gas prices?</h2>
<p>Several variables, the first of which is weather. If the winter is mild, then given current <a href="https://www.reuters.com/business/energy/european-gas-storage-track-meet-target-cost-2022-08-04/">European stock levels</a> we might be fine. If it’s very cold, that’s a different situation. </p>
<p>The war in Ukraine will be crucial. Were there to be some kind of peace agreement, gas prices could change overnight. But I doubt that will happen when the stakes are so high. If Putin loses the war, he’s finished. </p>
<p>Then there is China, which is a very big consumer of gas. Europe has been extremely fortunate that China has been struggling <a href="https://www.aljazeera.com/economy/2022/8/15/chinas-economy-slows-as-zero-covid-drags-down-sales-industry">with COVID</a> and <a href="https://www.cnbc.com/2022/07/20/chinas-homebuyers-are-running-out-of-patience-with-the-real-estate-slump.html">subprime property difficulties</a>. The <a href="https://www.reuters.com/world/china/chinas-retail-factory-sectors-unexpectedly-slow-july-2022-08-15/">most recent news</a> was very poor, suggesting it is heading for recession. </p>
<p>As a result, Chinese demand for LNG across 2022 looks set to fall <a href="https://www.woodmac.com/press-releases/chinas-lng-imports-to-see-unprecedented-decline-in-2022/#:%7E:text=After%20a%20solid%20growth%20in,%25%20year%2Don%2Dyear.">by at least 10%</a> from the 2021 level. If Chinese demand bounces back and it starts buying more LNG again, prices still have the potential to go up a lot. </p>
<p>As for the US, its LNG production has been reduced by the temporary closure of a <a href="https://www.bloomberg.com/news/articles/2022-08-03/us-natural-gas-surges-on-deal-for-october-lng-terminal-restart">major terminal</a> in Texas following an explosion. The <a href="https://www.bloomberg.com/news/articles/2022-08-03/us-natural-gas-surges-on-deal-for-october-lng-terminal-restart">latest news</a> suggests it will be back onstream by October, making more gas available to Europe. </p>
<p>But don’t assume that demand in the US stays as strong as it has been. It’s highly unlikely that the US will avoid a recession. </p>
<p>Even if inflation is on a <a href="https://www.ft.com/content/9d0cc752-9e65-45aa-8fc2-de0999cf632d">downward trajectory</a>, you still probably need four or five large increases in benchmark interest rates to get to positive real rates [meaning a positive rate after you subtract the rate of inflation], which many would argue is necessary to get inflation under control. Maybe benchmark rates have to double to over 5%. There’s no way the economy is going to stand still while you are doing that. </p>
<h2>So some potential pulls in both directions. What’s your best guess about where the price goes?</h2>
<p>Whereas oil is very sensitive to economic growth, this is less true of gas because a large amount of it is used for domestic heating and power (the UK is particularly dependent in these respects). Yes, demand for gas falls during a recession but it’s difficult to substitute on the domestic front.</p>
<p>So I come back to Putin. For him the key was to avoid an oil embargo, but that will happen one way or the other by early 2023. That makes it all the more important for him to continue to use gas as a weapon. We’ve seen how he has cut off countries to the east of Europe, and <a href="https://www.euractiv.com/section/energy/news/putin-warns-of-nord-stream-1-gas-capacity-cuts-over-turbine-repairs/">played games</a> over Germany’s supply. We’re very likely to see more of this, and uncertainty makes markets more volatile. </p>
<p>As long as Putin stays in power, prices are likely to stay elevated simply because he will make sure that they do. I think we’re going to continue to see the market trading above prices equivalent to <a href="https://www.cmegroup.com/markets/energy/natural-gas/dutch-ttf-natural-gas-usd-mmbtu-icis-heren-front-month.html">about US$60</a> (£50) per British thermal unit, which is crazy when you realise that the equivalent US price is US$9.</p>
<p><strong>European vs US gas prices</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="European vs US gas prices" src="https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=365&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=365&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=365&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=459&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=459&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479185/original/file-20220815-21-ql9a3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=459&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Orange = Dutch TTF gas futures; Blue = US gas futures.</span>
<span class="attribution"><a class="source" href="https://www.tradingview.com">Trading View</a></span>
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<h2>Are there any reasons for hope besides weather?</h2>
<p>We have seen the problem relatively early, so that maximises our chances of addressing it. I do worry when I see Labour and the Lib Dems in the UK, and politicians in places like Italy and Spain, calling for price freezes. That will just encourage more fossil fuel use at a time when we need to be bringing it down. Much better to help poorer people with handouts. </p>
<h2>Where do you see oil heading?</h2>
<p>All other things being equal, I think it stays around US$100 per barrel plus or minus US$10. I predicted prices would go higher in the early stages of the Ukraine war, which they did, but inflation and the economic outlook have since made a big difference. It’s now more obvious that the growth after the COVID lockdowns was thanks to the stimulus packages, and as I say, benchmark interest rates have to rise higher. </p>
<p>Over the longer term, there are those like <a href="https://www.marketwatch.com/story/why-goldmans-commodity-guru-jeff-currie-is-bullish-on-oil-despite-julys-pullback-11659113648">Goldman Sachs</a> who say we’re in the early stages of a super-cycle in oil which will see prices go much higher, due to the COVID stimulus packages and a long-term lack of investment in new oil production. But I do not quite agree. </p>
<p>I come at it from the other direction: by 2030 we need to reduce oil production from about 100 million to 70 million barrels per day to be on track to meet net zero commitments. In view of all the policies being put in place to make that happen, I think a decline in demand is inevitable.</p><img src="https://counter.theconversation.com/content/188767/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adi Imsirovic does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Hopes that prices will ease are probably wishful thinking.Adi Imsirovic, Senior Research Fellow, Oxford Institute for Energy Studies, University of SurreyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1885372022-08-14T04:51:09Z2022-08-14T04:51:09Z‘It’s important not to overreact’: top economists on how to fix inflation<figure><img src="https://images.theconversation.com/files/478696/original/file-20220811-23-37tbw1.png?ixlib=rb-1.1.0&rect=347%2C0%2C3293%2C1994&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s top economists are divided about how to tackle ballooning inflation of <a href="https://theconversation.com/inflation-hasnt-been-higher-for-32-years-what-now-187452">6.1%</a> that’s forecast to climb to a three-decade high of <a href="https://theconversation.com/the-chalmers-graphs-7-75-inflation-plunging-real-wages-weak-growth-187851">7.75%</a> by the end of the year.</p>
<p>Three of the 48 leading economists surveyed by the Economic Society of Australia and The Conversation say Australia should be able to tolerate an inflation rate of 8% or higher. </p>
<p>Seven expect inflation to fall back to an acceptable level without the need for any further action other than Reserve Bank adjustments to interest rates.</p>
<p>That view was lent weight by news from the United States last week that annual inflation slid from 9.1% to 8.5% in July, after inflation of <a href="https://twitter.com/WatcherGuru/status/1557378804481507328">zero</a> over the month.</p>
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<p>Asked how high an inflation rate Australia should be prepared to tolerate, most nominated a rate at the top of or above the Reserve Bank’s 2-3% target band. </p>
<p>Twelve nominated a rate well above the target band.</p>
<p>Ten said the step-up in inflation was primarily caused by events overseas not within Australia’s power to control. </p>
<p>The economists polled are recognised as leaders in their fields, including economic modelling and public policy. Among them are former Reserve Bank, Treasury and OECD officials, and a former member of the Reserve Bank board.</p>
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<h2>Beyond rate rises, what could be done?</h2>
<p>There are three kinds of actions governments can take to bring consumer price inflation down</p>
<ul>
<li><p>actions that suppress consumer spending (“<a href="https://www.investopedia.com/terms/d/demand.asp">demand</a>”)</p></li>
<li><p>actions that boost the supply of goods and services (“<a href="https://www.investopedia.com/terms/q/quantitysupplied.asp">supply</a>”)</p></li>
<li><p>actions that directly restrain prices</p></li>
</ul>
<p>Invited to choose from a <a href="https://cdn.theconversation.com/static_files/files/2241/August_2022_National_Economic_Poll_Inflation_-_Google_Forms.pdf">menu</a> of options, and add options to the menu, the panel placed slightly greater weight on measures to restrain demand than measures to boost supply, and greater weight on both than measures to directly restrain prices.</p>
<p>The most popular measure, backed by 37% of those surveyed, was winding back government spending. Almost as popular, backed by 33%, was a super-profits tax on fossil fuel producers, with the proceeds used to reduce cost of services.</p>
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<p>Another tax measure – increased income taxes with the proceeds used to reduce cost of services – was backed by 17%. Two of those surveyed wanted to abandon the legislated <a href="https://theconversation.com/stand-by-for-the-oddly-designed-stage-3-tax-cut-that-will-send-middle-earners-backwards-and-give-high-earners-thousands-182751">Stage 3 tax cuts</a> for higher earners due to take effect in 2024.</p>
<p>But several of those who advocated winding back government spending or boosting tax did so without enthusiasm, believing that while the government should be prepared to assist the Reserve Bank in suppressing consumer demand, suppressing demand wouldn’t tackle the main reasons prices were climbing.</p>
<h2>The risks of doing too much</h2>
<p>The Australian National University’s Robert Breunig said much of the inflationary pressure had come from things such as oil prices that were beyond the power of Australians to influence, making it “important not to overreact”.</p>
<p>Melbourne University banking specialist Kevin Davis said what appeared to be high inflation might actually mainly be a series of short-term supply-induced price rises, making it hard to see how choking demand could do much good. </p>
<p>Australia’s current <a href="https://theconversation.com/3-5-unemployment-australias-jobless-rate-at-its-lowest-since-1974-186917">ultra-low unemployment rate</a> was an achievement that should be celebrated, rather than put at risk without a good reason. </p>
<p>If high inflation did stay for a while and spread to wages, a welcome side effect would be more affordable housing.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rba-is-hiking-rates-because-its-scared-it-cant-contain-inflation-188011">The RBA is hiking rates because it's scared it can't contain inflation</a>
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<p>Curtin University macroeconomist Harry Bloch made the point that while measures to suppress demand in Europe and the United States would indeed have an impact on global energy and food prices, that wasn’t true of measures to suppress demand in Australia, which is too small to influence global prices.</p>
<p>Consulting economist Rana Roy disagreed, saying the fact that high inflation wasn’t primarily caused by excess demand was no reason not to treat it by containing demand. Whatever the cause, containing demand would contain inflation.</p>
<p>Mala Raghavan from the University of Tasmania and Leonora Risse from RMIT University suggested winding back or delaying spending in two areas where it was clear the government was contributing to domestically-driven higher prices: subsidies for, and spending on, construction and infrastructure.</p>
<h2>Withholding gas, boosting immigration</h2>
<p>The most popular ideas for boosting the supply of goods and services to take pressure off inflation were reserving a portion of Australian gas and other commodities for domestic use, and boosting immigration, supported by 33% and 29% of the economists surveyed.</p>
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<p>Reserving a portion of Australian east coast gas for use in Australia would help decouple Australia’s east coast gas prices from <a href="https://theconversation.com/why-did-gas-prices-go-from-10-a-gigajoule-to-800-a-gigajoule-an-expert-on-the-energy-crisis-engulfing-australia-184304">sky-high international prices</a> as has happened in Western Australia, which reserves 15% of its gas for domestic use.</p>
<p>Boosting immigration would take pressure off costs by easing labour shortages.</p>
<p>Federation University’s Margaret McKenzie suggested investigating blockages in supply chains and offering diplomatic and industry support to bust them. </p>
<h2>Subsidising childcare, subsidising fuel</h2>
<p>The most popular idea for directly restraining prices was increased subsidies for childcare, supported by 25% of the economists surveyed, several of whom suggested it could also boost the supply of workers who had previously been prevented from working by unaffordable childcare.</p>
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<p>Other ideas that would directly restrain some prices included pushing for below-inflation wage rises in the Fair Work Commission and extending the six-month cut in fuel excise <a href="https://images.theconversation.com/files/478555/original/file-20220810-16-x8gzjd.JPG">due to expire in September</a>.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/inflation-hasnt-been-higher-for-32-years-what-now-187452">Inflation hasn't been higher for 32 years. What now?</a>
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</em>
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<p>Former Reserve Bank board member Warwick McKibbin warned against pursuing low inflation for its own sake, saying when the economy was weak or in recession a high rate of inflation could be more easily justified than at other times. </p>
<p>He said the Reserve Bank should stop targeting inflation and instead target the rate of growth in national spending, an idea he will be putting to the independent <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/review-reserve-bank">review</a> of its operations.</p>
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<p><em>Detailed responses:</em></p>
<p><iframe id="tc-infographic-727" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/727/31a707c4f4bdf3af0aebb2c2d4fa43148f40f58e/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/188537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Asked how high an inflation rate Australia should prepare to tolerate, three of the 48 economists nominated 8% or higher. Seven expected inflation to fall without the need for further action.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1867842022-07-12T12:34:52Z2022-07-12T12:34:52ZBiden once wanted to make Saudi Arabia a ‘pariah’ – so why is he playing nice with the kingdom’s repressive rulers now?<figure><img src="https://images.theconversation.com/files/473425/original/file-20220711-14-2jli86.jpg?ixlib=rb-1.1.0&rect=28%2C23%2C3823%2C2691&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Joe Biden, then-Vice President meets with King Salman bin Abdulaziz Al Saud in 2011.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/MideastSaudiArabia/a918933d4667472085279bc34fb0c78e/photo?Query=Biden%20bin%20Salman&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=14&currentItemNo=9">AP Photo/Hassan Ammar</a></span></figcaption></figure><p>Even before setting foot in the Middle East for his first visit to the region as president, Joe Biden felt compelled to defend a portion of the trip. “I know that there are many who disagree with my decision to travel to Saudi Arabia,” Biden <a href="https://www.washingtonpost.com/opinions/2022/07/09/joe-biden-saudi-arabia-israel-visit/">acknowledged in an op-ed for The Washington Post</a>. He went on to restate his commitment to human rights – an issue on which Saudi rulers have <a href="https://www.hrw.org/world-report/2021/country-chapters/saudi-arabia">long stood accused of abusing</a>.</p>
<p>The president will fly to the kingdom of Saudi Arabia directly from Israel on July 15, 2022. The trip comes a year after the Biden administration released a <a href="https://int.nyt.com/data/documenttools/the-report-on-jamal-khashoggi-killing/ddc9578e0994f690/full.pdf">scathing intelligence report</a> on the murder of Jamal Khashoggi which concluded that Saudi Crown Prince Mohammed bin Salman approved the operation “to capture or kill” the Saudi journalist.</p>
<p>In his Washington Post article, Biden touted the sanctions and visa bans introduced by the U.S. in response to the killing.</p>
<p>But the tone was certainly softer than the criticism of Saudi Arabia that Biden leveled while on the 2020 presidential campaign trail. Back then, he said his administration would turn this repressive kingdom – a longtime U.S. partner of convenience – into a global “<a href="https://apnews.com/article/biden-retreats-saudi-arabia-sanctions-khashoggi-killing-d91d31edece5db07112d1c2d4dd3be33">pariah</a>.”</p>
<p>The visit represents a reversal of rhetoric and policy for Biden, especially as the agenda <a href="https://www.reuters.com/world/bidens-dilemma-what-about-photo-with-saudi-crown-prince-mbs-2022-07-11/">includes a meeting with the crown prince</a> accused over Khashoggi’s killing.</p>
<p>The Khashoggi affair highlights a <a href="https://www.amazon.com/gp/product/B001AOUBMM/">persistent oddity in American foreign policy</a>, one <a href="https://doi.org/10.1080/09592296.2015.1034570">I observed</a> in many years while working at the State Department and Department of Defense: selective morality in dealing with repressive regimes. Like his predecessors, Biden is <a href="https://foreignpolicy.com/2021/03/02/biden-middle-east-china-pivot-clinton-obama/">grappling with the geopolitical reality</a> that Saudi Arabia is needed to achieve certain U.S. objectives in the Middle East. Recent global developments – the war in Ukraine, fluctuating oil prices and ongoing inflation – underscore that reality. As Biden noted in his op-ed, to counter “Russia’s aggression” and put America in a position to “outcompete China,” the U.S. has to “engage directly with countries that can impact those outcomes.” And that means playing nice with the Saudis.</p>
<h2>A panoply of dictators</h2>
<p>Biden is not the only U.S. president to shy away from taking a harsh stance on the Saudis.</p>
<p>The Trump administration <a href="https://www.nytimes.com/2018/10/14/us/politics/trump-saudi-arabia-arms-deal.html">was reluctant</a> to confront Saudi Arabia over the killing of Khashoggi, a Washington Post columnist who lived in Virginia. Beyond <a href="https://www.apnews.com/9c79116125c740d084eaf3576d8958a8">revoking the visas</a> of some Saudi officials implicated in Khashoggi’s death, Trump did nothing to punish the kingdom for Khashoggi’s <a href="https://www.nytimes.com/2018/10/21/world/middleeast/erdogan-khashoggi-turkey-saudi-arabia.html">torture, assassination and dismemberment</a>.</p>
<p>Trump and other White House officials reminded critics that Saudi Arabia buys <a href="https://www.reuters.com/article/us-usa-saudi-security/obama-administration-arms-sales-offers-to-saudi-top-115-billion-report-idUSKCN11D2JQ">billions of dollars in weapons</a> from the U.S. and is a crucial partner in the American pressure campaign on Iran. Biden took a tougher line, <a href="https://www.nytimes.com/interactive/2021/02/26/us/report-jamal-khashoggi-killing.html?searchResultPosition=18">approving the release</a> of the intelligence report that blamed Crown Prince Mohammed for Khashoggi’s murder and <a href="https://www.reuters.com/article/us-usa-saudi-khashoggi-sanctions/u-s-imposes-sanctions-visa-bans-on-saudis-for-journalist-khashoggis-killing-idUSKBN2AQ2QI">sanctioning 76 lower-level Saudi officials</a>. The crown prince, however, was not on the list of those being sanctioned.</p>
<p>Saudi Arabia isn’t the only nation to get a free pass from the U.S. for its misdeeds. The U.S. has for decades <a href="https://www.amazon.com/gp/product/B007FI40QU/">maintained close ties</a> with some of the world’s worst human rights abusers. Ever since the United States emerged from the Cold War as the world’s dominant military and economic power, American presidents have seen financial and geopolitical benefit in overlooking the bad deeds of brutal regimes. </p>
<p>Before the Islamic revolution in 1979, Iran was a close U.S. ally. Shah Reza Pahlavi <a href="https://www.nytimes.com/2012/11/22/world/middleeast/years-of-torture-in-iran-comes-to-light.html">ruled harshly</a>, using his <a href="https://www.washingtonpost.com/archive/politics/1979/12/13/savak-jails-stark-reminder-of-shahs-rule/b2b37be2-356a-43e2-ba68-dd474e9023b0/?utm_term=.b82257b17760">secret police</a> to torture and murder political dissidents. </p>
<p>But the shah was also a secular, anti-communist leader in a Muslim-dominated region. President Richard Nixon <a href="https://www.researchgate.net/publication/249664268_The_Persian_Gulf_British_Withdrawal_and_Western_Security">hoped that Iran would be</a> the “Western policeman in the Persian Gulf.”</p>
<figure class="align-center ">
<img alt="US President Richard Nixon stands alongside Iranian Shah Reza Pavlavi as a soldier holds his sword up in a salute." src="https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=395&fit=crop&dpr=1 600w, https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=395&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=395&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=497&fit=crop&dpr=1 754w, https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=497&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/241639/original/file-20181022-105767-1n8n2y2.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=497&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Richard Nixon hosted Iranian Shah Reza Pavlavi at the White House in 1969.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Watchf-Associated-Press-Domestic-News-Dist-of-/a6784660844b49a69c5fc2b4e34e53df/211/0">AP Photo</a></span>
</figcaption>
</figure>
<p>After the shah’s overthrow, the Reagan administration in the 1980s became <a href="https://www.theguardian.com/world/2002/dec/31/iraq.politics">friendly with Iraqi dictator Saddam Hussein</a>. The U.S. supported him with intelligence during Iraq’s war with Iran and looked the other way at his use of chemical weapons.</p>
<p>And before Syria’s intense <a href="https://theconversation.com/the-war-in-syria-may-be-ending-but-is-likely-to-bring-a-fresh-wave-of-suffering-104635">bloody civil war</a>, which has killed an estimated 400,000 people and featured grisly <a href="https://theconversation.com/syria-chemical-weapons-and-the-limits-of-international-law-95045">chemical weapon attacks</a> by the government, its authoritarian regime enjoyed relatively friendly relations with the U.S.</p>
<p>Syria has been on the State Department’s list of <a href="https://www.state.gov/j/ct/list/c14151.htm">state sponsors of terrorism</a> since 1979. But presidents Nixon, Jimmy Carter, George H.W. Bush and Bill Clinton all met with President Bashar al-Assad’s father, who ruled from 1971 until his death in 2000. </p>
<h2>Why Saudi Arabia matters</h2>
<p>Before the assassination of Khashoggi by Saudi operatives, the 36-year-old crown prince was cultivating a reputation as a moderate reformer.</p>
<p>He has made newsworthy changes in the conservative Arab kingdom, allowing women <a href="https://qz.com/1313101/saudi-arabias-women-are-finally-allowed-to-drive-a-car-on-their-own/">to drive</a>, combating corruption and <a href="https://www.cbsnews.com/news/saudi-crown-prince-talks-to-60-minutes/">curtailing some powers</a> of the religious police. </p>
<p>Still, Saudi Arabia remains one of the world’s most authoritarian regimes. </p>
<p>Though women may now obtain a passport without the permission of a male guardian, they <a href="https://www.hrw.org/world-report/2020/country-chapters/saudi-arabia#49dda6">still need a guardian’s approval</a> to get married, leave prison or obtain certain medical procedures. And they must have the consent of a male guardian to enroll in college or look for a job. </p>
<p>The Saudi government also routinely arrests people without judicial review, according to <a href="https://www.hrw.org/world-report/2018/country-chapters/saudi-arabia">Human Rights Watch</a>. Citizens can be killed for nonviolent crimes, often in public. From January to mid-November 2019, 81 people <a href="https://www.hrw.org/world-report/2020/country-chapters/saudi-arabia#49dda6">were executed</a> for drug-related crimes.</p>
<p>Saudi Arabia ranks just a few places above North Korea on political rights, civil liberties and other measures of freedom, according to the democracy watchdog <a href="https://freedomhouse.org/countries/freedom-world/scores">Freedom House</a>. The same report ranks both Iran and China ahead of the Saudis on these measures.</p>
<p>But its wealth, strategic Middle East location and petroleum exports keep the Saudis as a vital U.S. ally. <a href="https://www.washingtonpost.com/politics/obamas-visit-to-ally-saudi-arabia-shadowed-by-tensions-with-the-kingdom/2016/04/20/a0a987e0-06eb-11e6-a12f-ea5aed7958dc_story.html?utm_term=.ec236b5e369b">President Barack Obama visited Saudi Arabia more</a> than any other American president – four times in eight years – to discuss everything from Iran to oil production.</p>
<h2>American realpolitik</h2>
<p>This kind of foreign policy – one based on practical, self-interested principles rather than moral or ideological concerns – is called “realpolitik.” </p>
<p>Henry Kissinger, secretary of state under Nixon, was <a href="https://thediplomat.com/2013/09/the-realpolitik-of-the-american-people/">a master of realpolitik</a>, which drove that administration to normalize its relationship with China. Diplomatic relations between the two countries had ended in 1949 when Chinese communist revolutionaries took power. </p>
<p>Then, as now, China was incredibly repressive. Only 16 countries, including Saudi Arabia, <a href="https://freedomhouse.org/report/freedom-world-2018-table-country-scores">are less free than China</a>, according to Freedom House. Iran, a country the U.S. wants Saudis to help keep in check, ranks ahead of China.</p>
<p>But China is also the world’s most populous nation and a nuclear power. Nixon, a fervent anti-communist, sought to exploit a growing rift between China and the Soviet Union. </p>
<p>Today, Washington retains the important, if occasionally rocky, relationship Kissinger forged with China, despite Beijing’s ongoing <a href="https://www.bbc.com/news/world-asia-china-45474279">persecution of Muslim minority groups</a>.</p>
<p>American realpolitik applies to Latin America, too. After the Cuban Revolution of 1959, the U.S. regularly backed Central and South American <a href="https://chicago.suntimes.com/columnists/u-s-support-for-brutal-central-american-dictators-led-to-todays-border-crisis/">military dictators</a> who tortured and killed citizens to “defend” the Americas from communism. </p>
<h2>US not ‘so innocent’</h2>
<p>U.S. presidents tend to underplay their relationships with repressive regimes, lauding lofty “American values” instead. </p>
<p>That’s the language Obama used in 2018 to <a href="https://www.vox.com/policy-and-politics/2018/9/7/17832024/obama-speech-trump-illinois-transcript">criticize Donald Trump’s embrace of Russia’s authoritarian president</a>, Vladimir Putin, citing America’s “commitment to certain values and principles like the rule of law and human rights and democracy.”</p>
<p>But Trump defended his relationship with Russia, tacitly invoking American realpolitik. “You think our country’s <a href="https://www.cnn.com/2017/02/04/politics/donald-trump-vladimir-putin/index.html">so innocent</a>?” he asked on Fox News. </p>
<p>As Trump alluded to, the U.S. <a href="https://www.h-net.org/reviews/showpdf.php?id=21231">has for decades maintained close ties</a> to numerous regimes whose values and policies conflict with America’s constitutional guarantees of democracy, freedom of speech, separation of church and state, the right to due process and many others. </p>
<p>It still does.</p>
<p><em>This story is an updated version of an <a href="https://theconversation.com/saudi-arabia-is-a-repressive-regime-and-so-are-a-lot-of-us-allies-105106">article</a> originally on published Oct. 22, 2018.</em></p><img src="https://counter.theconversation.com/content/186784/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jeffrey Fields receives funding from the MacArthur Foundation, the Carnegie Corporation of New York, and Schmidt Futures. He is affiliated with The Atlantic Council. </span></em></p>Joe Biden is set to make his first visit as president to the Middle East, during which he will meet the Saudi crown prince the US accuses of ordering the murder of a journalist.Jeffrey Fields, Associate Professor of the Practice of International Relations, USC Dornsife College of Letters, Arts and SciencesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1856762022-06-23T11:49:22Z2022-06-23T11:49:22ZFederal gas tax holiday: Biden says it will provide ‘a little bit of relief’ – but experts say even that may be a stretch<figure><img src="https://images.theconversation.com/files/470390/original/file-20220622-11-8yvi2o.jpg?ixlib=rb-1.1.0&rect=104%2C67%2C3992%2C2659&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gas prices are at record highs. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/GasolinePrices/5a001648107d4a9a8e0c898ab6404213/photo?Query=gasoline&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=8076&currentItemNo=49">AP Photo/Gene J. Puskar</a></span></figcaption></figure><p><em>President Joe Biden <a href="https://finance.yahoo.com/news/president-biden-gas-tax-suspension-102442992.html">called on Congress</a> to suspend the federal gas tax to “bring families just a little bit of relief” as average gasoline prices <a href="https://www.eia.gov/dnav/pet/pet_pri_gnd_a_epmr_pte_dpgal_w.htm">exceed US$5 a gallon</a>. The tax is <a href="https://www.eia.gov/tools/faqs/faq.php?id=10&t=5">18.4 cents on regular gasoline</a> and 24.4 cents on diesel. Biden’s proposal would rescind both taxes for 90 days.</em></p>
<p><em>Several states, such as <a href="https://www.nbcnews.com/politics/politics-news/maryland-georgia-announce-gas-tax-holidays-federal-efforts-stall-congr-rcna20687">Maryland</a> and <a href="https://www.wabe.org/kemp-signs-law-suspending-georgia-gas-taxes-through-may/">Georgia</a>, have temporarily waived their state gasoline taxes to reduce the burden on consumers.</em></p>
<p><em>The Conversation asked four experts whether gas tax waivers are an effective way to provide economic relief to U.S. households, what revenue from the federal gas tax is used for and what other impacts these measures could have.</em></p>
<h2>Not much relief</h2>
<p><strong>Jay Zagorsky, Senior Lecturer in Markets, Public Policy and Law, Boston University</strong> </p>
<p>As an <a href="http://businessmacroeconomics.com/">economist</a> who has <a href="https://theconversation.com/hard-evidence-why-pump-prices-havent-fallen-as-fast-as-oil-has-39162">studied gasoline prices</a>, I doubt that waiving gas taxes will meaningfully lower prices at the pump. Russia’s invasion of Ukraine boosted <a href="https://www.wsj.com/articles/gasoline-prices-shoot-up-at-fastest-rate-on-record-11647957303">gasoline prices dramatically</a>, and with the <a href="https://newsroom.aaa.com/2022/06/from-sea-to-shining-sea-aaa-predicts-47-9-million-people-will-travel-this-july-4th/">summer driving season</a> in full swing, politicians feel a need to show voters they are doing something. Cutting gas taxes makes great political theater, but as a few numbers show, it is an ineffective policy.</p>
<p>Government data shows that in an average day, the <a href="https://www.eia.gov/dnav/pet/pet_cons_prim_a_EPM0_P00_Mgalpd_a.htm">U.S. uses about 350 million gallons of gasoline</a>. That is pretty close to the <a href="https://www.census.gov/popclock/">population of 333 million people</a>, so on average the typical person uses about one gallon of gas per day.</p>
<p>Let’s assume the entire reduction of the gas tax is passed on to the consumer. That means average savings of just 18 cents a day, or $16.56 over 90 days. Sixteen dollars will <a href="https://thegate.boardingarea.com/the-average-cost-of-pizza-in-each-state-in-the-united-states/">buy you about two cheese pizzas</a>. Given that before the pandemic the typical U.S. family <a href="https://www.bls.gov/opub/reports/consumer-expenditures/2020/pdf/home.pdf">spent about $2,100 on gas each year</a>, $16 barely registers.</p>
<p>Moreover, we have some data on what happens during a gas tax holiday from when Maryland tried it a few months ago. According to the American Automobile Association, the average price of gasoline in Maryland <a href="https://gasprices.aaa.com/state-gas-price-averages/">just before the state’s gas tax holiday</a> was $4.25 per gallon. Two days after the state stopped charging the gas tax, prices were $3.81. A 44-cent drop may look significant, but it’s not that simple.</p>
<p>First, not all of that decrease happened because of eliminating the gas tax. Neither Delaware nor the District of Columbia, both of which border Maryland, had waived their gas taxes. However, over the same time period, Delaware gas prices declined by 19 cents per gallon and Washington’s prices fell by almost 16 cents. These drops are partly due to <a href="https://www.cbsnews.com/news/gas-prices-fall-oil-ukraine-russia/">falling oil prices</a>. Florida, which is far from Maryland, saw a 16-cent drop per gallon over this same time period.</p>
<p>I believe the president’s proposal, unfortunately, will not provide much relief at the pump.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/ixL3mDejAYU?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Americans drive far more today than they did 30 years ago, but highway construction funding hasn’t kept up.</span></figcaption>
</figure>
<h2>Less money to fix roads</h2>
<p><strong>Theodore J. Kury, Director of Energy Studies, Public Utility Research Center, University of Florida</strong></p>
<p>Federal highway maintenance is primarily paid for with gas tax revenues that flow into the Highway Trust Fund. The federal levy of 18.4 cents per gallon, <a href="https://theconversation.com/the-gas-taxs-tortured-history-shows-how-hard-it-is-to-fund-new-infrastructure-163152">unchanged for almost 30 years</a>, is a major component of these revenues, along with taxes on <a href="https://www.fhwa.dot.gov/infrastructure/gastax.cfm">diesel fuel, gasohol, methanol, liquefied gases and compressed natural gas</a>.</p>
<p>The federal government collects roughly <a href="https://www.cbo.gov/publication/57138#:%7E:text=Status%20of%20the%20Highway%20Trust%20Fund,-The%20federal%20government's&text=In%202019%2C%20%2445%20billion%20in,gasoline%20and%20other%20motor%20fuels">$37 billion to $38 billion per year in revenues</a> from the gas tax. These revenues have remained fairly consistent over the past five years, even through the heart of the pandemic. Other highway-related fines and fees also go into the Highway Trust Fund, but their magnitude is comparatively small.</p>
<p>In 2020, the latest year for which numbers are available, the federal government spent roughly <a href="https://www.fhwa.dot.gov/policyinformation/statistics/2020/fa5.cfm">$46 billion on highway projects</a>. This figure does not include the subsidies that the federal government extends to state and local governments to reduce the cost of borrowing for highway projects.</p>
<p>But if the government collected $38 billion in gas taxes, where did the other $8 billion come from? Since most politicians <a href="https://apnews.com/article/joe-biden-business-government-and-politics-628666300e1ed0c9ad11c6eb8c608c4f">strongly resist raising gas taxes</a>, even to pay for much-needed repairs, the government has turned to less transparent alternatives. </p>
<p>Several times in the past decade, officials have shored up the balance in the Highway Trust Fund with intragovernmental transfers from other accounts. Most recently, the fund received <a href="https://www.fhwa.dot.gov/highwaytrustfund/docs/fe-1_jan2022.pdf">$10 billion this way in October 2020 and $90 billion in December 2021</a>. That represents $100 billion that was not spent providing other services.</p>
<p>If the Highway Trust Fund faces more shortfalls, program managers will either greenlight fewer infrastructure maintenance projects or transfer money from other programs. This would be the most likely outcome if Congress opts to suspend the federal gas tax.</p>
<p>Ultimately, taxpayers pay for everything that the government does. Policymakers simply decide how and when that will happen.</p>
<h2>Waivers only help drivers</h2>
<p><strong>Erich J. Muehlegger, Associate Professor of Economics, University of California, Davis</strong></p>
<p>Research shows that for decades, lower-income households have <a href="http://dx.doi.org/10.1086/NTJ41789255">spent a larger fraction of their budgets</a> on gasoline than <a href="https://doi.org/10.1016/j.ecolecon.2017.03.025">higher-income households</a>. The growing transition to electric vehicles has contributed to this pattern because high-income households in the U.S. <a href="http://dx.doi.org/10.1086/706793">have been more likely to go electric</a> and, as a result, pay less in gasoline taxes. </p>
<p>This means that a gas tax holiday tends to benefit lower-income households relatively more than higher-income households, but there are two important caveats. </p>
<p>First, not everyone benefits from a gas tax holiday. The very poor who lack cars, urban households who rely on public transit, and the elderly, who tend to drive less, benefit less from a tax holiday because they consume less gasoline. A gas tax holiday can soften the blow of high gasoline prices for commuters, but it provides little direct benefit to households that do not drive. </p>
<p>Second, even optimistic estimates suggest that gas tax holidays produce relatively modest savings for households. That’s because gasoline taxes are <a href="https://www.eia.gov/energyexplained/gasoline/factors-affecting-gasoline-prices.php">a small component of the price of gasoline</a> in the U.S., especially relative to crude oil prices. </p>
<p>Even if savings from a waiver of the 18.4 cents-per-gallon federal gas tax were entirely passed on to consumers, a typical motorist who drives 10,000 miles per year in a 20 miles-per-gallon Ford F-150 would see about $7.70 in savings per month from a federal gas tax holiday. Drivers of more fuel-efficient vehicles would save even less. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1538962927528448001"}"></div></p>
<h2>Consider aid for heating and cooling</h2>
<p><strong>Sanya Carley, Professor of Public and Environmental Affairs, Indiana University</strong></p>
<p>Millions of Americans face material hardship on a daily basis, and energy costs are a primary contributor. A gas tax waiver could temporarily help relieve people who have to rely on gasoline for transportation and who live in <a href="https://doi.org/10.1038/s41560-020-00763-9">energy poverty</a>.</p>
<p>Current gasoline price spikes are happening at an especially hard time for many households. </p>
<p>In a recent study, colleagues and I found that 28% of all low-income households <a href="https://energyjustice.indiana.edu/doc/ejl-energy-insecurity-report-winter-2022.pdf">struggled to pay their energy bills</a> from November 2021 through January 2022, and 38% carried debt on their utility accounts. Now, with higher gasoline prices, filling a 12-gallon tank can cost about $60, up from about $26 in 2020. That increase may prevent households with limited budgets from covering all of their expenses, including basic needs such as food and health care.</p>
<p>Households with vulnerable members, such as small children or people with chronic health issues, are especially burdened by energy expenses than other groups. Temporary relief can be especially helpful for these consumers.</p>
<p>But a gas tax holiday may not be the most effective way to deliver that relief, especially since these waivers are temporary. Direct assistance to households for food and energy spending, or investments in <a href="https://www.energy.gov/energysaver/weatherize">weatherizing homes</a> to reduce their heating and cooling bills, could provide larger and more lasting benefits.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/would-gas-tax-breaks-make-a-big-difference-when-prices-are-skyrocketing-we-asked-4-experts-179892">article originally published</a> on March 24, 2022.</em></p><img src="https://counter.theconversation.com/content/185676/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erich Muehlegger receives funding from the National Science Foundation and has received funding from the State of California Public Transportation Account and the Road Repair and Accountability Act of 2017 (Senate Bill 1) via the University of California Institute of Transportation Studies.
</span></em></p><p class="fine-print"><em><span>Sanya Carley receives funding from the National Science Foundation, the Alfred P. Sloan Foundation, and the Indiana University Office of the Vice president for Research.
</span></em></p><p class="fine-print"><em><span>Theodore J. Kury is the Director of Energy Studies at the University of Florida’s Public Utility Research Center, which is sponsored in part by the Florida electric and gas utilities and the Florida Public Service Commission, none of which has editorial control of any of the content the Center produces.</span></em></p><p class="fine-print"><em><span>Jay L. Zagorsky does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We asked four experts to explain what gas taxes are used for and whether waiving them will make much of a difference to American households.Jay L. Zagorsky, Senior Lecturer in Markets, Public Policy and Law, Questrom School of Business, Boston UniversityErich Muehlegger, Associate Professor of Economics, University of California, DavisSanya Carley, Professor of Public and Environmental Affairs, Indiana UniversityTheodore J. Kury, Director of Energy Studies, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1853022022-06-19T08:03:05Z2022-06-19T08:03:05ZWhat’s driving the surge in South Africa’s fuel price<figure><img src="https://images.theconversation.com/files/469439/original/file-20220617-13-pcl1a8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Photo by Lyu Tianran/Xinhua via Getty Images</span></span></figcaption></figure><p>Increases in the domestic price of fuel are big news in South Africa, with the price of petrol, diesel and paraffin <a href="https://www.gov.za/speeches/minister-gwede-mantashe-announces-adjustment-fuel-prices-effect-1-june-2022-31-may-2022">reaching new highs</a>. The underlying reason for the price increases is movements in the <a href="https://tradingeconomics.com/commodity/crude-oil">international price of crude oil</a>. The acceleration in the international price of crude oil <a href="https://www.wsj.com/articles/why-gas-prices-expensive-11646767172">is linked</a> to the Russian war in the Ukraine. </p>
<p>The expectation is that the crude oil price will remain at an elevated level for <a href="https://www.bbc.com/news/business-60509453">the duration of the war</a>.</p>
<p>Internationally, crude oil is priced in US dollar per barrel. Recently the price exceeded <a href="https://www.cnbc.com/2022/06/06/oil-markets-saudi-arabia-crude-price-hike.html">US$120 per barrel</a>. This is not the highest level ever for the crude oil price. The highest ever nominal historic level of US$147.02 per barrel was reached <a href="http://news.bbc.co.uk/2/hi/business/7501939.stm">on 11 July 2008</a>. On that occasion the price of crude oil increased owing to military tension about Iran. Adjusted for inflation since 2008, this amounts to some US$200 per dollar in current values. There is therefore room for further increases in the price of crude oil.</p>
<p>The crude oil price in US dollar is determined by international forces of supply and demand. </p>
<p>The international oil price pressure leads to <a href="https://www.iol.co.za/motoring/industry-news/heres-how-much-youll-pay-for-fuel-after-junes-%20massive-increase-c08bdfe9-f00c-42ad-8ef4-2a2fb6c6d593">higher landed cost</a> for fuel in South Africa. The landed cost in US dollars is converted to rand <a href="http://www.energy.gov.za/files/PPA-Campaigns/gauteng/Nov2017/Basic-Fuel-Prices-DoE.pdf">at the prevailing exchange rate</a>. Any weakness in the rand exchange rate against the US dollar therefore results in a higher domestic petrol price.</p>
<p>Political and economic stability to ensure a stable (or even appreciating) exchange rate is therefore of the utmost importance in the strategy to contain the domestic fuel price. </p>
<p>Once the domestic base price for fuel is determined, a variety of levies, taxes and margins <a href="https://www.shell.co.za/motorists/shell-fuels/petrol-price.html">are added</a> to calculate the pump price that the consumer pays. In an attempt to alleviate the impact of the increase in fuel prices, the government has waived some portion of the fuel (tax) levy as a temporary relief measure.</p>
<p>However, this cannot be done on a permanent basis, given the precarious fiscal position of the government. Any permanent reduction in the government’s fuel levy will necessitate an increase in other taxes raised by the government.</p>
<p>There is, however, one charge in the cost structure of the fuel price that can be reconsidered. This is the merchant service fee banks charge for the use of debit and credit cards. Admittedly, any reduction in this fee will impact negatively on the gross revenue of banks, but will also reduce the cost of filling station operations.</p>
<h2>What goes into the fuel price</h2>
<p>The fuel levies include transport to inland provinces, thus <a href="https://www.shell.co.za/motorists/shell-fuels/petrol-price.html">explaining the difference</a> in the fuel price between coastal and inland regions. These levies are fixed and subject to periodic revision.</p>
<p>The <a href="https://www.dailymaverick.co.za/article/2022-06-01-petrol-price-increase-explainer/">most important </a> are government’s fuel levy (about 20% of the retail price) and the road accident fund levy (about 11%). These levies apply to both petrol and diesel.</p>
<p>Another important levy is the gross margin allowed for filling station operators. This levy amounts <a href="https://businesstech.co.za/news/energy/581972/here-is-the-%20official-petrol-price-for-may-and-its-bad-news-for-diesel/">to some 10%</a> of the retail price of petrol, while it is determined through retail price setting per filling station in the case of diesel sales. Filling station operators determine their gross margin on their diesel sales, as only the wholesale price is regulated.</p>
<p>To soften the blow of higher fuel prices for consumers, the South African government decided <a href="https://mg.co.za/business/2022-05-31-government-extends-r1-50-general-fuel-levy-reprieve-but-also-announces-steep-price-increases-from-june-1/">to waive some portion</a> of the fuel levy as a temporary relief measure. However, this measure is not sustainable, as government revenue <a href="https://www.news24.com/news24/columnists/cyrilramaphosa/cyril-ramaphosa-fuel-levy-cant-remain-suspended-indefinitely-but-there-are-other-things-we-can-do-20220606">is eroded</a>.</p>
<p>The retail levy on petrol accruing to the operators of filling stations is <a href="https://www.dailymaverick.co.za/article/2022-06-01-petrol-price-increase-explainer/">currently R2.29 per litre</a>. But this is not the profit per litre of petrol sold at retail level.</p>
<p>This retail levy of R2.29 includes <a href="https://www.fueldirectory.co.za/directory-search.php">87c per litre</a> for the remuneration of pump attendants and other administrative staff members at filling stations. South Africa has about 5,000 filling stations where some 60,000 pump attendants are employed. In addition, it is estimated that these filling stations employ some 15,000 to 20,000 administrative staff members.</p>
<p>If the petrol price is deregulated and the margin for the remuneration of these staff members is removed, South Africa might lose as many as 80,000 job opportunities. Given South Africa’s <a href="https://www.statssa.gov.za/?p=15407#:%7E:text=Q1%3A2022%20saw%20the%20total,rate%20of%203%204%2C5%25">official unemployment rate of 34.5% </a>, this increase in unemployment can’t be afforded. In addition, the cancellation of this wage levy on petrol will reduce the price by only about 3.6%.</p>
<p>The retail levy also provides for site rental of filling stations in instances where sites are not owned by the operators. After the deduction of the rental allowance of 75c per litre and the allowance of 87c per litre for staff costs, site operators are left with 67c per litre. This is their gross revenue and is used to cover other costs such as municipal services, bank charges, other overheads and professional fees. Whatever remains, is the net income of the fuel station operator.</p>
<p>One important cost item that is not provided for sufficiently in the fuel levy structure, is the merchant service fee charges of the financial services industry on payment for fuel by credit and debit cards. Until 2009, South Africa allowed fuel sales only by means of cash or debit card, but this changed with the addition of credit cards as a payment instrument for fuel <a href="https://www.sanews.gov.za/south-africa/motorists-%20can-pay-fuel-credit-card">as one of the preparatory measures for the country’s hosting of the World Soccer Cup</a>.</p>
<p>The use of debit and credit cards comes at a cost for fuel station operators. This merchant service fee differs for debit and credit cards, and also differs between banks and card service providers. On debit cards the merchant service fee is in excess of 0,5% of the transaction value, or more than 12c per litre. On credit cards this fee [amounts to as much as 1,75% of the transaction value](https://www.iol.co.za/business-report/economy/sas-latest-fuel-hikes-benefit-financial-service-firms-like-visa-and-mastercard-says-fuel-retailers-association-53bd26f3-84c6-4fae-a2e2-d57ed013a4e1 as much as 1,75% of the transaction value (credit card interchange plus bank commission), or some 42,3c per litre at inland filling stations.</p>
<p>This merchant service fee is also the only component in the fuel retail value chain that increases automatically when the fuel price increases, as was the case in recent months.</p>
<p>Admittedly, this fee will also decrease when the fuel price declines.</p>
<p>In the quest to find alternatives to reduce the retail price of fuel, one strategy is a revision of this “invisible” fuel levy charged in the form of the merchant service fee.</p><img src="https://counter.theconversation.com/content/185302/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jannie Rossouw is an NRF-rated researcher and previously received research assistance from the NRF. He owns shares in Capitec Bank. </span></em></p>The underlying reason for the price increases is the acceleration in the international price of crude oil, linked to the Russian war in the Ukraine.Jannie Rossouw, Visiting Professor at the Business School, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1842732022-06-02T18:22:54Z2022-06-02T18:22:54ZUkraine recap: bogged down in the bloody Donbas region<figure><img src="https://images.theconversation.com/files/466659/original/file-20220601-48614-mxke6n.jpg?ixlib=rb-1.1.0&rect=0%2C8%2C5703%2C3608&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">EPA-EFE/stringer</span>, <span class="license">Fourni par l'auteur</span></span></figcaption></figure><p>It’s now over 14 weeks since Vladimir Putin sent Russia’s military machine into Ukraine expecting a relatively easy victory. It’s fair to say that the “special military operation” is not panning out the way the Russian president or his planners had envisaged. </p>
<p>The main focus of the fighting continues to be in the Donbas region in the country’s east, where Russian territorial gains are being met with a terrible butcher’s bill on both sides. Portsmouth University’s military strategist, Frank Ledgwidge, says Russia has <a href="https://theconversation.com/ukraine-war-despite-russias-success-in-donbas-this-is-only-the-end-of-the-beginning-183955">lost more troops</a> killed since February 24 than in ten years of fighting in Afghanistan – implying that well over 40,000 Russian soldiers have been taken out of the game. Ukraine’s casualties, Ledwidge estimates, are also grievous. </p>
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Read more:
<a href="https://theconversation.com/ukraine-war-despite-russias-success-in-donbas-this-is-only-the-end-of-the-beginning-183955">Ukraine war: despite Russia's success in Donbas, this is only the end of the beginning</a>
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<p>Ledwidge’s regular analysis has so far proved remarkably prescient: you may remember he predicted on day two of the conflict that Ukraine’s armed forces would put up stiff resistance and rightly that the battle for the Donbas would be protracted and bloody. </p>
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<p>Meanwhile, the first Russian soldier has been convicted in a war crimes trial and sentenced to life imprisonment. Vadim Shishimarin, 21, was sentenced for the killing of a 62-year-old man who was shot in the head in a village in the northeastern Sumy region in the opening days of the war. </p>
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<img alt="Ukraine Recap weekly email newsletter" src="https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/449743/original/file-20220303-4351-1xhaozt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><strong><em>This is our weekly recap of expert analysis of the Ukraine conflict.</em></strong>
<em>The Conversation, a not-for-profit news group, works with a wide range of academics across its global network to produce evidence-based analysis. Get these recaps in your inbox every Thursday. <a href="https://theconversation.com/uk/newsletters/ukraine-recap-114?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+Newsletter+Ukraine+Recap+2022+Mar&utm_content=WeeklyRecapTop">Subscribe here</a>.</em></p>
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<p>Legal scholar Robert Goldman of American University in Washington – an expert on the law of war – believes that, while Ukraine is entitled to try the young tank commander for the murder, it may <a href="https://theconversation.com/war-crimes-trial-of-russian-soldier-was-perfectly-legal-but-that-doesnt-make-it-wise-183586">not have been wise to pursue the case</a> while the war still rages and in a civilian court. He also cautions that while Ukraine may well have observed due process of law in presenting the prosecution, not that this precedent has been set, there’s no guaranteeing Russia will be so scrupulous.</p>
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Read more:
<a href="https://theconversation.com/war-crimes-trial-of-russian-soldier-was-perfectly-legal-but-that-doesnt-make-it-wise-183586">War crimes trial of Russian soldier was perfectly legal – but that doesn't make it wise</a>
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<p>Another big item on the news agenda at the moment is the cost of living crisis, and war in Ukraine is exacerbating that considerably. The sharp increase in oil and gas prices, as well as riding food prices and shortage, can all – at least in part – be attributed to Putin’s war. </p>
<p>Birmingham University’s Stefan Wolff and his collaborator Tatyana Malyarenko of the National University of Odesa have taken a detailed look at the <a href="https://theconversation.com/ukraine-war-rising-food-prices-are-not-the-only-global-economic-fallout-183577">economic fallout from the conflict</a> and how this is likely to play into global political instability. One largely unforeseen consequence, they write, is the way this is affecting the US relationship with China – which will bear watching in the weeks and months ahead.</p>
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Read more:
<a href="https://theconversation.com/ukraine-war-rising-food-prices-are-not-the-only-global-economic-fallout-183577">Ukraine war: rising food prices are not the only global economic fallout</a>
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<h2>The diplomatic front</h2>
<p>One aspect of China-US relations in the news this week has involved the US stance on Taiwan. US president Joe Biden appeared to be rewriting America’s policy of “strategic ambiguity”, when he made a recent pledge to the effect that the US would take military action to defend Taiwan if China launched an invasion. Russia’s invasion has, as you’d expect, focused White House minds on the possibility that this might indeed come to pass. </p>
<p>Christoph Bluth and Owen Greene, international relations experts at the University of Bradford, believe that in the event of a Chinese invasion of Taiwan, the US will face a <a href="https://theconversation.com/how-ukraine-war-could-boost-tensions-between-us-and-china-over-future-of-taiwan-183745?notice=Article+has+been+updated.">completely different set of challenges</a> to those posed by Putin’s aggression in Ukraine.</p>
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<strong>
Read more:
<a href="https://theconversation.com/how-ukraine-war-could-boost-tensions-between-us-and-china-over-future-of-taiwan-183745">How Ukraine war could boost tensions between US and China over future of Taiwan</a>
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<p>Closer to home, meanwhile, there has been a spate of intense diplomatic activity sparked by Russia’s aggression. The last Ukraine recap focused on the decision of Finland and Sweden to seek membership of Nato, and this week Owen Greene has taken a closer look at the <a href="https://theconversation.com/sweden-a-history-of-neutrality-ends-after-200-years-183583">history of Swedish neutrality</a> since the Napoleonic wars. This stance began to change after Russia annexed the Crimea when the country began to seek closer defence cooperation with its neighbours and, through Nato members Denmark and Norway, with the North Atlantic alliance itself.</p>
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Read more:
<a href="https://theconversation.com/sweden-a-history-of-neutrality-ends-after-200-years-183583">Sweden: a history of neutrality ends after 200 years</a>
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<p>Denmark is also examining its defensive alliances and is voting on whether to end its opt-out from the European Union’s defence policy. It’s a significant move, as the EU has been bolstering its own defensive capabilities of late, so a vote in favour of ending the opt-out – according to Imelda Maher of University College Dublin and Dermot Hodson of Birkbeck, University of London – would <a href="https://theconversation.com/why-denmark-is-voting-on-its-defence-relationship-with-the-eu-and-what-it-says-about-democracy-in-europe-182732">accelerate that growth</a>.</p>
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Read more:
<a href="https://theconversation.com/why-denmark-is-voting-on-its-defence-relationship-with-the-eu-and-what-it-says-about-democracy-in-europe-182732">Why Denmark is voting on its defence relationship with the EU – and what it says about democracy in Europe</a>
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<h2>Collateral damage</h2>
<p>Just a few months ago, the European Space Agency (Esa) was preparing for the launch of the Rosalind Franklin rover on its trip to Mars, part of the ExoMars mission, a collaboration between Europe and Russia. Russia was to have provided several key components of the mission, including a rocket to launch it on its journey and the radioactive heaters to keep the batteries of the rover warm in the cold Martian nights.</p>
<p>Now, says space scientist Andrew Coates of University College London, Esa will need to <a href="https://theconversation.com/our-mars-rover-mission-was-suspended-because-of-the-ukraine-war-heres-what-were-hoping-for-next-183927">find new partners for the mission</a>. If this turns out to be Nasa, as is widely thought, this will further widen Russia’s rift with the west.</p>
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Read more:
<a href="https://theconversation.com/our-mars-rover-mission-was-suspended-because-of-the-ukraine-war-heres-what-were-hoping-for-next-183927">Our Mars rover mission was suspended because of the Ukraine war – here's what we're hoping for next</a>
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<p>And finally, while you will have seen Russian and Belarus tennis stars competing in the French Open this week, you won’t be seeing these top players at Wimbledon, which has banned all competitors from the two countries. The likes of men’s world number two Daniil Medvedev, men’s number eight Andrey Rublev, and Belarusian former women’s world number two Aryna Sabalenka have been allowed to play as individuals rather than representing their respective countries. </p>
<p>As Leon Davis of Teeside University and Mike Duignan of the University of Surrey – both experts in event management – observe here, any of these players who openly express support for the Russian invasion <a href="https://theconversation.com/french-open-understanding-why-russian-and-belarusian-tennis-players-are-competing-despite-wimbledon-ban-181823">will face sanctions</a> and many of them have won plaudits for openly opposing the war. But, caution Davis and Duignan, even those Russian and Belarusian players who don’t actually live in their birth country any more are likely to have families there who could be endangered if they are too outspoken against the invasion.</p>
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Read more:
<a href="https://theconversation.com/french-open-understanding-why-russian-and-belarusian-tennis-players-are-competing-despite-wimbledon-ban-181823">French Open: understanding why Russian and Belarusian tennis players are competing despite Wimbledon ban</a>
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<p><em>Ukraine Recap is available as a weekly email newsletter. <a href="https://theconversation.com/uk/newsletters/ukraine-recap-114?utm_source=TCUK&utm_medium=linkback&utm_campaign=UK+Newsletter+Ukraine+Recap+2022+Mar&utm_content=WeeklyRecapBottom">Click here to get our recaps directly in your inbox.</a></em></p><img src="https://counter.theconversation.com/content/184273/count.gif" alt="The Conversation" width="1" height="1" />
A digest of the week’s coverage of the war against Ukraine.Jonathan Este, Senior International Affairs Editor, Associate EditorLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1820552022-05-02T20:43:47Z2022-05-02T20:43:47ZBeyond electric cars: how electrifying trucks, buses, tractors and scooters will help tackle climate change<figure><img src="https://images.theconversation.com/files/460722/original/file-20220502-24-l5zyne.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C6000%2C3368&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>When you think of an electric vehicle, chances are you’ll picture a car. But there’s a quiet revolution going on in transport. It turns out electrification can work wonders for almost all of our transport options, from electric bikes to motorbikes to buses to freight trains and even to tractors and heavy trucks. There will soon be no need to burn petrol and diesel in an internal combustion engine. </p>
<p>This matters, because electric transport will be vital in our efforts to stem climate change. If all cars on the road became powered by renewable electricity, we’d cut almost one-fifth of our emissions. We’d also be much better placed to weather spikes in oil prices linked to war, and enjoy cleaner air and quieter cities. </p>
<p>It’s promising news that electric vehicles are shaping up as an election issue at last, with Labor promising a <a href="https://www.theguardian.com/australia-news/2022/may/01/labors-election-pitch-five-key-policies-unveiled-at-partys-campaign-launch">national EV charging network</a> at its campaign launch, and the Greens <a href="https://reneweconomy.com.au/greens-launch-6-1-billion-electric-vehicle-policy-in-new-election-pitch/">promising rebates</a> of up to $15,000 for EV purchases, while the Liberal Party last year reversed its previous scepticism and launched a <a href="https://www.theguardian.com/environment/2021/nov/09/coalition-releases-electric-vehicle-strategy-but-rules-out-subsidies">smaller charging network</a> policy. </p>
<p>But this is only the beginning of what’s required. Right now, all the focus is on electric cars. We will need new policy settings to encourage the electrification of all our transport options. And that means getting electric mobility on the radar of our political parties. </p>
<h2>Why electric and why now?</h2>
<p>Electric vehicles have been around for more than 120 years. They accounted for a third of all cars on US roads in 1900, sought because they were clean and quiet. But their first dawn ended because of the high cost and weight of batteries, leaving internal combustion engines to rule the road. </p>
<p>So what changed? Two things: solar has become the cheapest form of power in human history, and lighter lithium-ion batteries have become vastly cheaper. These remarkable inventions have allowed electric vehicle manufacturers to become competitive. Cheap solar power funnels into the battery of the electric vehicle to provide running costs much lower than those of fossil fuel engines. The much simpler engines also mean vastly lower maintenance costs. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Early electric car" src="https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=472&fit=crop&dpr=1 754w, https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=472&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/460731/original/file-20220502-24-93lsmh.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=472&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A Borland Electric Model car from the early 20th century.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:Borland_Electric_Model_50_(NBY_8011).jpg">Wikimedia Commons</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>We’re also seeing major innovations brought across from electric public transport. Over the past two decades, there have been significant advances in smart technology in trains and trams, such as regenerative braking and sensors enabling active suspension. These breakthroughs have been taken up enthusiastically by electric vehicle manufacturers. All electric cars now have regenerative braking, which hugely increases energy efficiency, as well as smart sensors to aid steering, and active suspension, making the cars safer and the ride smoother. </p>
<p>We’re also seeing welcome cross-pollination in the form of trackless trams, which are upgraded buses that boast rail-like mobility. This is made possible based on technologies <a href="https://theconversation.com/why-trackless-trams-are-ready-to-replace-light-rail-103690">invented</a> for high-speed rail. </p>
<p>In short, there’s no reason why solar and battery technology has to be limited to cars. All the world’s land-based internal combustion engine vehicles can now be replaced by electric equivalents. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Electric locomotive" src="https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=395&fit=crop&dpr=1 754w, https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=395&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/460745/original/file-20220502-18-h5wi18.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=395&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Major miner BHP is testing battery-electric locomotives such as this Wabtec model.</span>
<span class="attribution"><span class="source">Wabtec</span></span>
</figcaption>
</figure>
<h2>Electric mobility is arriving</h2>
<p>You’ll already have seen signs of the potential of electric mobility. E-scooters are popping up in major cities, giving people a way to make short trips quickly and cheaply. E-bikes are surging ahead, popular among commuters and families choosing one <a href="https://www.newcastleherald.com.au/story/7695624/why-e-bikes-are-booming-on-newcastle-streets/">over a second car</a>. Even this is just the start. </p>
<p>Around the world, electric micromobility (scooters, skateboards and bikes) is growing at over 17% per year and <a href="https://www.alliedmarketresearch.com/micro-mobility-market-A11372">expected to quadruple</a> current sales of US$50 billion by 2030.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/revolutionary-changes-in-transportation-from-electric-vehicles-to-ride-sharing-could-slow-global-warming-if-theyre-done-right-ipcc-says-179535">Revolutionary changes in transportation, from electric vehicles to ride sharing, could slow global warming – if they’re done right, IPCC says</a>
</strong>
</em>
</p>
<hr>
<p>Even without much government assistance, Australians are shifting rapidly to all types of electric vehicle. But for Australia to embrace electric transport as fully as we can, we need the right policy settings. Cars, scooters, motorbikes, trackless trams, buses, trucks, freight trains and farm vehicles can all be part of the transition to the cheapest and highest-quality mobility the world has yet seen. </p>
<p>The policies on offer to date suggest no party has figured out the radical upheaval electrification will bring. Labor’s emission reductions policy of a 43% cut by 2030 gives electric cars only a tiny role, cutting emissions by less than 1%, or four million tonnes out of a total of 448 million tonnes. There’s no mention of other electric modes of transport. Even the Greens have little serious policy analysis of the broader EV options. The Liberals have no mention at all. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/460738/original/file-20220502-104692-drojpg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Even tractors are going electric, with a key marketing point the ability for farmers to recharge through their own solar arrays.</span>
<span class="attribution"><span class="source">Fendt</span></span>
</figcaption>
</figure>
<h2>We need comprehensive, broad electric vehicle policy</h2>
<p>Given we’re still at the starting line, what’s the best first step? Perhaps the simplest would be to enable Infrastructure Australia to work with the states on creating strategic directions for each electric transport mode. The ACT already has a plan like this for its bus network as part of its shift to a zero-carbon future. </p>
<p>Here’s what good EV policies would consider: </p>
<ul>
<li><p>Electric micromobility: how to recharge and manage the explosion of electric scooters, skateboards and bikes with appropriate infrastructure, and how to enable the best <a href="https://theconversation.com/e-scooters-bikes-and-urban-mobility-lessons-from-the-streets-of-paris-125619">public sharing systems</a></p></li>
<li><p>Electric public transit: how to electrify all buses, passenger trains and mid-tier transit (light rail, rapid transit buses and trackless trams), and how to link net zero urban developments and charging facilities</p></li>
<li><p>Electric trucks, freight trains and farm vehicles: how to create recharge highways and hubs in train stations, industrial precincts and standalone farm systems, and how to introduce these to the regions to enable net zero mining, agriculture and other processed products.</p></li>
</ul>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/as-the-world-surges-ahead-on-electric-vehicle-policy-the-morrison-governments-new-strategy-leaves-australia-idling-in-the-garage-169824">As the world surges ahead on electric vehicle policy, the Morrison government's new strategy leaves Australia idling in the garage</a>
</strong>
</em>
</p>
<hr>
<p>Each of these modes will also need the same targets, subsidies and regulations as electric cars do, to make possible a swift, clean transition away from petrol and diesel. If we focus only on electric cars, we could end up with cities still full of cars, even if they don’t pollute. By focusing on all transport modes, we will make our cities <a href="https://link.springer.com/book/10.5822/978-1-61091-613-4">more equitable, safe and sustainable</a>.</p><img src="https://counter.theconversation.com/content/182055/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Newman has been the IPCC Co-ordinating Lead Author for Transport over the past 3 years supported only in transport costs by the Federal Department of Industry, Science, Energy and Resources.</span></em></p>Electric cars are important - but we can now electrify all land-based transport, from buses to bikes to trucks. We need good policy settings.Peter Newman, Professor of Sustainability, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1804612022-03-31T22:08:16Z2022-03-31T22:08:16ZBiden bets a million barrels a day will drive down soaring gas prices – what you need to know about the Strategic Petroleum Reserve<figure><img src="https://images.theconversation.com/files/455663/original/file-20220331-27-vt56yf.jpg?ixlib=rb-1.1.0&rect=83%2C56%2C1913%2C1167&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Several sites, such as this one near Freeport, Texas, store the hundreds of million of barrels in the United States' Strategic Petroleum Reserve.
</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpBudgetOilReserve/1fad28d8a83747e8a102a2948130bd55/photo?Query=strategic%20petroleum%20reserve&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=21&currentItemNo=15">Department of Energy via AP</a></span></figcaption></figure><p>The Biden administration on March 31, 2022, said it <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/31/fact-sheet-president-bidens-plan-to-respond-to-putins-price-hike-at-the-pump/">plans to release</a> an unprecedented 180 million barrels of oil from the U.S. Strategic Petroleum Reserve to combat the <a href="https://fred.stlouisfed.org/series/GASREGW">recent spike in gas</a> and <a href="https://www.washingtonpost.com/business/energy/the-oil-price-rally-is-bad-the-diesel-crisis-is-far-worse/2022/03/14/e207748a-a36c-11ec-8628-3da4fa8f8714_story.html">diesel prices</a>. About a million barrels of oil will be released every day for up to six months. </p>
<p>If all the oil is released, it would represent almost one-third of the <a href="https://www.eia.gov/dnav/pet/pet_stoc_wstk_dcu_nus_w.htm">current volume of the Strategic Petroleum Reserve</a>. It follows a <a href="https://www.energy.gov/articles/doe-announces-emergency-sale-30-million-barrels-crude-oil-strategic-petroleum-reserve">release of 30 million barrels</a> in early March, a large withdrawal until the latest one.</p>
<p>But what is the <a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-9">Strategic Petroleum Reserve</a>, why was it created, and when has it been used? And does it still serve a purpose, given that the <a href="https://www.eia.gov/energyexplained/oil-and-petroleum-products/imports-and-exports.php">U.S. exports more oil and other petroleum products than it imports</a>?</p>
<p>As an <a href="https://scholar.google.com/citations?user=dCRySjIAAAAJ&hl=en&oi=ao">energy researcher</a>, I believe considering the reserve’s history can help answer these questions.</p>
<h2>Origins of the reserve</h2>
<p>Congress created the Strategic Petroleum Reserve as part of the <a href="https://www.govtrack.us/congress/bills/94/s622/text">Energy Policy and Conservation Act</a> of 1975 in response to a global oil crisis.</p>
<p>Arab oil-exporting states led by Saudi Arabia had <a href="https://history.state.gov/milestones/1969-1976/oil-embargo">cut supply to the world market</a> because of Western support for Israel in the 1973 Yom Kippur War. Oil <a href="https://www.federalreservehistory.org/essays/oil-shock-of-1973-74">prices quadrupled</a>, resulting in major economic damage to the U.S. and other countries. This also shook the average American, who had grown used to cheap oil.</p>
<p>The oil crisis caused the U.S., Japan and 15 other advanced countries to form the <a href="https://www.iea.org/about/history">International Energy Agency</a> in 1974 to recommend policies that would forestall such events in the future. One of the agency’s key ideas was to create <a href="https://www.iea.org/articles/oil-stocks-of-iea-countries">emergency petroleum reserves</a> that could be drawn on in case of a severe supply disruption. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A map with red dots showing locations of SPR spots." src="https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=434&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=434&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=434&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=545&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=545&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433615/original/file-20211124-21-19klpqd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=545&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The map shows the locations of the oil held in the Strategic Petroleum Reserve.</span>
<span class="attribution"><a class="source" href="https://www.energy.gov/fecm/strategic-petroleum-reserve-4">Department of Energy</a></span>
</figcaption>
</figure>
<p>The Energy Policy and Conservation Act originally stipulated the reserve should hold up to 1 billion barrels of crude and refined petroleum products. Though it has never reached that size, the U.S. reserve is the largest in the world, with a <a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-9">maximum volume of 714 million barrels</a>. The cap was previously set at 727 million barrels. </p>
<p>As of March 25, 2022, the reserve <a href="https://www.eia.gov/dnav/pet/pet_stoc_wstk_dcu_nus_w.htm">contained about 568 million barrels</a>.</p>
<p>Oil in the reserve is <a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-4">stored underground</a> in a series of large underground salt domes in four locations along the Gulf Coast of Texas and Louisiana, and is linked to major supply pipelines in the region.</p>
<p>Salt domes, formed when a mass of salt is forced upward, <a href="https://cvmidstream.com/sound/">are a good choice for storage</a> since salt is impermeable and has low solubility in crude oil. Most of the storage sites were acquired by the federal government in 1977 and <a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-4">became fully operational</a> in the 1980s. </p>
<p><iframe id="7chGV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/7chGV/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>History of drawdowns</h2>
<p>In the 1975 act, Congress specified that the reserve was intended to prevent “severe supply interruptions” – that is, actual oil shortages. </p>
<p>Over time, as the oil market has changed, Congress expanded the list of reasons for which the Strategic Petroleum Reserve could be tapped, such as domestic supply interruptions due to extreme weather. </p>
<p>Prior to March 2022, <a href="https://crsreports.congress.gov/product/pdf/R/R46355">about 280 million barrels</a> of crude oil had been released since the reserve’s creation, including a <a href="https://www.nytimes.com/2021/11/23/business/biden-oil-reserves-gas-prices.html">50 million release</a> that began in November 2021. </p>
<p><a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-0#1991DesertStorm">There have only been three emergency releases</a> in the reserve’s history. The first was in 1991 after Iraq invaded Kuwait the year before, which <a href="https://www.econlib.org/archives/2014/06/who_caused_the.html">resulted in a sharp drop</a> in oil supply to the world market. The U.S. released 34 million barrels.</p>
<p>The second release, of 30 million barrels, came in 2005 after <a href="https://www.oe.netl.doe.gov/docs/HurricaneComp0508r2.pdf">Hurricanes Rita and Katrina knocked out Gulf of Mexico production</a>, which then comprised about 25% of U.S. domestic supply. </p>
<p>The third was a coordinated release by the International Energy Agency in 2011 as a result of <a href="https://www.bakerinstitute.org/media/files/files/d7396022/IFRI-pub-GlickStrategicOilReserves-2011.pdf">supply disruptions from several oil-producing countries</a>, including Libya, then facing civil unrest during the Arab Spring. In all, the agency coordinated a release of 60 million barrels of crude, half of which came from the U.S.</p>
<p>In addition, there have been <a href="https://www.energy.gov/fecm/strategic-petroleum-reserve-0">11 planned sales of oil from the reserve</a>, mainly to generate federal revenue. One of these – the 1996-1997 sale to reduce the federal budget deficit – <a href="https://www.nytimes.com/1996/04/30/us/president-decides-us-will-soon-sell-oil-from-reserves.html">seemed to serve political ends</a> rather than supply-related ones.</p>
<figure class="align-center ">
<img alt="Elderly white guy wearing a blue suit stands in front of a podium with the seal of the US president and gesticulates with both hands as a logo of the white house is displayed in the background" src="https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&rect=233%2C65%2C4635%2C3014&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/455659/original/file-20220331-13-hvimgv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">President Joe Biden is betting that a massive release of oil from the nation’s petroleum reserve will help drive down gas prices.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Biden/e1d888e798a74dafb16bddec29101112/photo?Query=gas%20prices&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=4930&currentItemNo=28">AP Photo/Patrick Semansky</a></span>
</figcaption>
</figure>
<h2>A better way to avoid pain at the pump</h2>
<p>President Joe Biden’s November decision to tap the reserve <a href="https://www.politico.com/news/2021/11/23/biden-oil-reserves-gasoline-prices-523241">was also seen as political</a> by Republicans because there was no emergency shortage of supply at that time. </p>
<p>Similarly, the latest historic release of 180 million barrels could also be seen as serving a political purpose – in an election year, no less. But I believe it also seems perfectly legitimate in terms of fulfilling the Strategic Petroleum Reserve’s original purpose: reducing the negative impacts of a <a href="https://theconversation.com/oil-price-shocks-have-a-long-history-but-todays-situation-may-be-the-most-complex-ever-178861">major oil price shock</a>. </p>
<p>Though the U.S. <a href="https://www.eia.gov/todayinenergy/detail.php?id=49596">is today a net petroleum exporter</a>, it continues to import as much as <a href="https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbblpd_m.htm">8.2 million barrels</a> of crude oil every day. </p>
<p>[<em>Over 150,000 readers rely on The Conversation’s newsletters to understand the world.</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-150ksignup">Sign up today</a>.]</p>
<p>But in my view, the best way to avoid the pain of <a href="https://theconversation.com/soaring-crude-prices-make-the-cost-of-pretty-much-everything-else-go-up-too-because-we-almost-literally-eat-oil-179809">oil price shocks</a> is to lower oil demand by <a href="https://theicct.org/publications/ev-us-market-growth-cities-sept21">reducing global carbon emissions</a> – rather than mainly relying on releases from the reserve. </p>
<p><em>This is an updated version of an <a href="https://theconversation.com/biden-taps-the-strategic-petroleum-reserve-what-is-it-where-did-it-come-from-and-does-the-us-still-need-it-172473">article originally published</a> on Nov. 24, 2021.</em></p><img src="https://counter.theconversation.com/content/180461/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Scott L. Montgomery does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The total release could reach 180 million barrels over six months, which would make it the biggest in the history of the Strategic Petroleum Reserve.Scott L. Montgomery, Lecturer, Jackson School of International Studies, University of WashingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1798092022-03-28T12:36:22Z2022-03-28T12:36:22ZSoaring crude prices make the cost of pretty much everything else go up too because we almost literally eat oil<figure><img src="https://images.theconversation.com/files/454417/original/file-20220325-21-bbs2ud.jpg?ixlib=rb-1.1.0&rect=168%2C25%2C5439%2C3707&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Hopefully, we aren't actually what we eat.</span> <span class="attribution"><a class="source" href="https://media.gettyimages.com/photos/man-drinking-gasoline-picture-id182459958?k=20&m=182459958&s=612x612&w=0&h=9SD6-sBRvJQSgzo0ra_AWt0FZEuzM9TEHnUfTiKYTQY=">ozgurdonmaz/iStock via Getty Images</a></span></figcaption></figure><p>The price of oil has been spiking in recent weeks <a href="https://www.nytimes.com/2022/02/02/business/economy/oil-price.html">in response to concerns</a> that the war in Ukraine will significantly reduce supply. But what happens in oil markets never stays in oil markets. </p>
<p>The price of U.S. crude oil <a href="https://www.cnbc.com/2022/03/06/us-crude-oil-jumps-to-125-a-barrel-a-13-year-high-on-possible-western-ban-of-russian-oil.html">jumped to a 13-year high</a> of US$130 on March 6, 2022. It has come down but <a href="https://www.bloomberg.com/quote/CL1:COM?sref=Hjm5biAW">has been trading above $110 since March 17</a>. That’s over 60% higher than it was in mid-December, before fears of a Russian invasion began to mount. </p>
<p>Of course, this has pushed up the cost of gasoline, which hit an <a href="https://fred.stlouisfed.org/series/GASREGW">average of $4.32 per gallon in the U.S. on March 14</a>. But it’s less well understood how rising energy prices leak into the prices consumers pay for toys, electronics, food and almost every other product you could think of. </p>
<p>Energy is becoming one of the <a href="https://www.bbc.com/news/business-60833361">main causes of inflation</a>, by which I mean a sustained, generalized increase in the prices of goods and services in an economy. The latest data shows prices are rising at an <a href="https://www.bls.gov/news.release/cpi.nr0.htm">annualized pace of 7.9%</a>, the highest in 40 years.</p>
<p>In <a href="https://scholar.google.com/citations?hl=en&user=GyTN5PYAAAAJ">my economics classes</a>, I like to joke to my students that we eat petroleum. Students have a hard time imagining drinking crude oil or gasoline, but in fact it’s both figuratively and almost literally true – and I’m not even referring to how humans ingest about a <a href="https://news.trust.org/item/20201208090301-obmrm">credit card’s worth of oil-based plastic</a> every week. </p>
<p>Let me explain.</p>
<p><iframe id="7CX08" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/7CX08/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Planes, packages and polyester</h2>
<p>Oil prices affect the prices of other goods and services in a few significant ways. </p>
<p>The most obvious is that <a href="https://www.eia.gov/energyexplained/gasoline/use-of-gasoline.php">petroleum powers the vast majority</a> of cars, planes and other vehicles that move stuff around. About <a href="https://www.eia.gov/tools/faqs/faq.php?id=41&t=6">71% of the 6.6 billion barrels of petroleum the U.S. consumed in 2020</a> was used for various types of fuels, such as gas, diesel and jet fuel. </p>
<p>This pushes up <a href="https://totalreliancelogistics.com/how-changing-fuel-costs-impact-shipping-rates/">transportation costs and makes shipping</a> everything from refrigerator components to everyday items like toothpaste more expensive. Businesses can choose to absorb the cost – for example, if their market is highly competitive – <a href="https://www.whitehouse.gov/cea/written-materials/2021/07/09/the-importance-of-competition-for-the-american-economy/">but usually pass it on to customers</a>.</p>
<p>But oil is also a key ingredient in much of the stuff people buy, both in the packaging and in the products themselves, especially food. That’s where most of the <a href="https://www.eia.gov/tools/faqs/faq.php?id=41&t=6">other 29% of the oil Americans use comes in</a>.</p>
<p>Petrochemicals derived from petroleum are used to manufacture clothes, computers and more. For example, the quantity of oil-based polyester in clothing <a href="https://cfda.com/resources/materials/detail/polyester">has doubled since 2000</a>. Over half of all <a href="https://www.forbes.com/sites/amynguyen/2021/07/11/time-to-go-cold-turkey--new-report-explores-fashions-harmful-addiction-to-fossil-fuel-based-fabrics-and-greenwashing/?sh=5860c7a4146e">fibers produced around the world are</a> now made from petroleum, requiring over 1% of all oil consumed.</p>
<p>In addition, the <a href="https://www.exxonmobil.com/en/whiteoil/industry-solutions/pharmaceutical-and-cosmetics">cosmetic industry is heavily dependent on petroleum</a> since items such as hand cream, shampoo and most makeup are made out of petrochemicals. And like with many products, all those creams and beauty liquids are put in single-use <a href="https://www.plasticpollutioncoalition.org/blog/the-cosmetics-industrys-plastic-packaging-problem">plastic containers</a> made from oil.</p>
<p>Similarly, the <a href="https://www.ecobirdy.com/blogs/news/plastic-toys">vast majority of toys</a> produced today are made out of plastic.</p>
<h2>Crude in our cookies</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A green tractor pulls a fertilizer attachment in a green field containing red winter wheat" src="https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=900&fit=crop&dpr=1 600w, https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=900&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=900&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1131&fit=crop&dpr=1 754w, https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1131&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/454419/original/file-20220325-25-1dfutk8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1131&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Fertilizer is the biggest use of oil in industrial farming.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/AlaPlanting/38b933236c574e3a891132367f096a50/photo?Query=field%20fertilizer%20tractor&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=2&currentItemNo=0">AP Photo/John David Mercer</a></span>
</figcaption>
</figure>
<p>The food industry is especially sensitive to the price of energy, <a href="https://wedocs.unep.org/bitstream/handle/20.500.11822/25302/Valuing_Plastic_ES.pdf">more so than any other sector</a> because <a href="https://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/nrcs141p2_023113.pdf">petroleum is such a key component</a> of its supply chain at every step of the way, from planting and harvesting through processing and packaging. </p>
<p>Interestingly, the biggest usage of petroleum in industrial farming is not transportation or fueling machinery but rather the <a href="https://sustainability.emory.edu/wp-content/uploads/2018/02/InfoSheet-Energy26FoodProduction.pdf">use of fertilizers</a>. <a href="https://www.resilience.org/stories/2005-04-01/why-our-food-so-dependent-oil">Vast amounts of oil and natural gas</a> go into fertilizers and pesticides that are used to produce and protect grains, vegetables and fruits. </p>
<p>That’s one of the reasons <a href="https://www.nationalgeographic.com/environment/article/end-cheap-oil">it takes 283 gallons of oil</a> to raise one 1,250-pound steer. And it’s why even a loaf of bread <a href="http://lcafood.dk/lca_conf/contrib/g_reinhardt.pdf">requires an unusually high amount of energy</a>.</p>
<p>Oil is also an ingredient in the food we consume. The main food product that comes from petroleum is known as <a href="https://www.petro-online.com/news/fuel-for-thought/13/breaking-news/what-foods-contain-petroleum/37415">mineral oil</a>. It’s commonly used to make foods last longer because petroleum doesn’t go rancid. Packaged baked goods like <a href="https://bakerpedia.com/ingredients/mineral-oil/">cookies and pizza</a> often contain mineral oil as a way of preserving their shelf life. </p>
<p><a href="https://www.mcgill.ca/oss/article/food-health-news/food-dyes-science">Petrochemicals are also used</a> to make food dyes, which can be found in <a href="https://jwww.doi.org/10.1177/0009922814530803">cereals and candy</a>.</p>
<p><a href="https://www.britannica.com/science/paraffin-wax">Paraffin wax</a>, a colorless or white wax made from petroleum, is used in the <a href="https://www.thespruceeats.com/what-is-paraffin-wax-1807043">production of some chocolates and sprayed onto fruits</a> to slow down spoilage and give them a glossy finish. It also helps chocolates stay solid at room temperature. </p>
<p>And plastic is a vital part of food packaging because it is relatively cheap, <a href="https://www.chemicalsafetyfacts.org/plastics/">durable and lightweight, it provides protection</a> and is sanitary. </p>
<figure class="align-center ">
<img alt="Red strawberries are packed in clear plastic packages and stacked on a shelf" src="https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/454420/original/file-20220325-19-195yhec.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Fruit and other foods commonly come in plastic containers made from oil.</span>
<span class="attribution"><a class="source" href="https://media.gettyimages.com/photos/strawberry-on-supermarket-shelf-picture-id186854067?k=20&m=186854067&s=612x612&w=0&h=4FHOZfN8puc8YYsgM9gdnx54M24JlRF1g7oVefAADwk=">nycshooter/E+ via Getty Images</a></span>
</figcaption>
</figure>
<h2>Oil inflation and the Fed</h2>
<p>The importance of oil to the U.S. economy has been a <a href="https://www.routledge.com/Eating-Oil-Energy-Use-In-Food-Production/Green/p/book/9780367167646">big concern</a> since the oil crisis of 1973, when prices spiked, prompting calls to conserve energy. </p>
<p>Since then, the amount of oil consumed for every dollar of economic output <a href="https://www.energypolicy.columbia.edu/research/report/oil-intensity-curiously-steady-decline-oil-gdp">has declined about 40%</a>. In 1973, for example, it took just under one barrel of oil to produce $1,000 worth of economic output. Today, it takes less than half a barrel. That’s the good news. </p>
<p>The bad is that, because the U.S. economy <a href="https://fred.stlouisfed.org/series/GDP">is now 18 times bigger than it was in 1973</a>, it requires a lot more oil to function. </p>
<p>That’s why the surging price of oil is <a href="https://www.bbc.com/news/business-60833361">now the main driver</a> of inflation – and why the Federal Reserve is <a href="https://www.bloomberg.com/news/articles/2022-03-21/powell-says-fed-ready-to-hike-faster-go-restrictive-if-needed">preparing for some big increases</a> in <a href="https://theconversation.com/why-the-fed-cant-stop-prices-from-going-up-anytime-soon-but-may-have-more-luck-over-the-long-term-179339">interest rates to fight it</a>. </p>
<p>[<em>Get the best of The Conversation, every weekend.</em> <a href="https://memberservices.theconversation.com/newsletters/?nl=weekly&source=inline-weeklybest">Sign up for our weekly newsletter</a>.]</p><img src="https://counter.theconversation.com/content/179809/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Veronika Dolar does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Oil is used throughout the US economy. It goes into packaging, toys, clothing and especially the food we eat.Veronika Dolar, Assistant Professor of Economics, SUNY Old WestburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1786932022-03-14T17:40:20Z2022-03-14T17:40:20ZHow the war in Ukraine will affect food prices<figure><img src="https://images.theconversation.com/files/451892/original/file-20220314-99009-7nxaca.jpg?ixlib=rb-1.1.0&rect=23%2C42%2C3128%2C1951&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The war in Ukraine will continue to push up food prices as the supply from the 'Breadbasket of Europe' is cut in the short term and, possibly, the long term. </span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>Even before the Russian army crossed into Ukraine, food prices had been on the rise for the past year. But the world has seen large jumps in the cost of food over the the last two months. </p>
<p>Globally, <a href="https://www.fao.org/worldfoodsituation/foodpricesindex/en/">food is 20 per cent more expensive</a> now than it was a year ago, with prices rising four per cent since January this year. In Canada, the <a href="https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000403">annual food inflation</a> rate hit 6.5 per cent in January, the highest in more than a decade. </p>
<p>A variety of factors have caused these price increases, including rising <a href="https://www.bloomberg.com/news/newsletters/2022-02-16/supply-chain-latest-u-s-freight-cost-surge-means-little-inflation-relief">transportation costs</a>, <a href="https://globalnews.ca/news/8670501/supply-chain-issues-canada-manufacturers/">supply chain disruptions</a> and <a href="https://www.fooddive.com/news/food-commodity-prices-soar-as-russia-invades-ukraine/619400/">rising commodity prices</a>, such as corn and wheat.</p>
<p>The war in Ukraine will continue to push up food prices as the supply from the “Breadbasket of Europe” is cut in the short term and, possibly, the long term depending on how the conflict plays out. </p>
<h2>War and wheat prices</h2>
<p>Ukraine and Russia represent around 10 per cent and 20 per cent, respectively, of global wheat production, and nearly 30 per cent of all wheat exports come from <a href="https://www.fao.org/3/cb9013en/cb9013en.pdf">these two countries</a>. Most of this wheat is imported by countries in the Middle East and North Africa. </p>
<p>For example, Lebanon and Tunisia, two countries with vulnerable economies, import more than half of their <a href="https://datawrapper.dwcdn.net/LX3Bg/3/">wheat from Ukraine</a>. Consequently, production from Ukraine, or lack thereof, influences global food security. While Ukraine has been a consistent supplier in the past, we’ve seen global <a href="https://ageconsearch.umn.edu/record/46503/">shortages impact food security before</a>.</p>
<figure class="align-center ">
<img alt="A map of the world showing that some countries, like Turkey, import more than half their calories from Ukraine and Russia." src="https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=412&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=412&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=412&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=518&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=518&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451881/original/file-20220314-99009-171ikdk.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=518&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Proportion of calories from food that are imported from Russia and Ukraine.</span>
<span class="attribution"><a class="source" href="https://datawrapper.dwcdn.net/LX3Bg/3/">(David Laborde)</a></span>
</figcaption>
</figure>
<p>The wheat export supply chains from Ukraine have been disrupted by the conflict. Port facilities in Ukraine have <a href="https://www.reuters.com/world/europe/russia-halts-vessel-movement-azov-sea-black-sea-open-2022-02-24/">suspended commercial operations</a>, preventing the outflow of the wheat crop harvested in 2021. </p>
<p>While the 2022 wheat crop was planted last fall, other crops need to be planted soon. Final production for all crops in Ukraine depends on <a href="https://www.reuters.com/world/ukraines-farmers-stalled-fueling-fears-global-food-shortages-2022-03-11/">farmers being in their fields</a>, not fighting a war, to fertilize, harvest and move the crop, if the supply chain is sturdy enough. </p>
<p>Since Russia invaded the Ukraine, concerns about supply disruptions have pushed up <a href="https://www.cmegroup.com/markets/agriculture/grains/wheat.quotes.html">wheat prices on the Chicago Board of Trade</a> by over 50 per cent to nearly US$13 per bushel. Prices rose by the maximum possible allowed by the board for the first five trading days of March — an unprecedented increase.</p>
<h2>Domestic and international impacts</h2>
<p>Higher wheat prices will translate into higher food prices for all. But the impact will depend on the farmer share of their food dollar, and the percentage of an individual’s income spent on food. </p>
<p>A significant increase in the price of wheat won’t mean an equally large increase in the price of bread in Canada and the United States. This is because the average <a href="https://www.ers.usda.gov/data-products/price-spreads-from-farm-to-consumer/">farmer’s share for every dollar spent on a loaf of bread is four cents</a> (four per cent). For flour, which is less processed than bread, the farmer’s share is 19 cents (19 per cent). </p>
<p>Overall, the <a href="https://www.ers.usda.gov/data-products/food-dollar-series/documentation.aspx">farmer share of the food dollar</a> in the U.S. is approximately 15 per cent, and it’s <a href="https://doi.org/10.1093/aepp/ppu034">slightly higher in Canada</a>. The greater degree of value added to the product beyond the farm gate, the lower the farm share. </p>
<p>In contrast, there is a strong correlation between wheat price and bread price in <a href="https://doi.org/10.1038/s43016-021-00279-9">developing countries, where the farmer share</a> of the food dollar can be close to 50 per cent. Wheat price increases will have a significant impact on the price paid for wheat-based products.</p>
<h2>Income matters too</h2>
<p>The relative effect of any food price increase will also depend on the share of income spent on food. This share declines with the wealth of the nation or consumer, as summarized by <a href="https://corporatefinanceinstitute.com/resources/knowledge/economics/engels-law/">Engel’s Law</a>. </p>
<p>The average Canadian household spends <a href="https://www.weforum.org/agenda/2016/12/this-map-shows-how-much-each-country-spends-on-food/">less that 10 per cent of its income on food</a>. An increase in the cost of food can be absorbed, although it will lower the amount of disposable income for other goods and services. Food price increases take away income for things like leisure activities.</p>
<p>In less-developed countries — and for poorer households domestically — the share of income spent on food can be above 40 per cent. For example, Lebanon and Yemen will need to import wheat at a higher cost than what they were paying for wheat from Ukraine, in a tight market. The large price increase will force a corresponding large increase in the price of bread, given the higher farmer share of the food dollar. </p>
<figure class="align-center ">
<img alt="Round flatbreads cool on a rack in a bakery." src="https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451887/original/file-20220314-18-1i069wk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Egyptian traditional ‘baladi’ flatbread, at a bakery, in el-Sharabia, Shubra district, Cairo. The war in Ukraine has stopped shipments of wheat and other staples to North Africa and elsewhere.</span>
<span class="attribution"><span class="source">(AP Photo/Nariman El-Mofty)</span></span>
</figcaption>
</figure>
<p>The financial consequences for those consumers will be large given the relatively high percentage of income spent on food, and bread in particular. With less room to divert income from other expenditures, food security may be compromised. Low-income Canadians who are also facing rent increases will be similarly squeezed.</p>
<p>Another factor influencing the distributional impact of an increase in wheat price is whether the household or region is a wheat producer or consumer. Developing countries with a large share of poor households in urban areas are especially vulnerable to the financial hit of an increase in wheat price. </p>
<p>A decade ago, when <a href="https://ideas.repec.org/p/ags/uguewp/46503.html">crop prices last rose significantly</a>, <a href="https://doi.org/10.1093/ajae/aau038">food riots broke out</a> in countries with a high concentration of poor consumers in urban areas, including Egypt, Mexico and Pakistan. In contrast, other developing countries with a high proportion of small farms can sell some of their crop into the market. These farmers benefit from a commodity price increase and the benefits also accrue to the broader economy as these small farmers have a bit more money to spend. </p>
<h2>The compounding factor of energy prices</h2>
<p>The Russian invasion of Ukraine has also shocked energy markets. Russia produces <a href="https://yearbook.enerdata.net/natural-gas/world-natural-gas-production-statistics.html">23 per cent of the world’s natural gas</a>, and about 40 per cent of the European Union’s natural gas comes from Russia. Russia is also a <a href="https://www.iea.org/reports/russian-supplies-to-global-energy-markets/oil-market-and-russian-supply-2">major exporter of oil</a>.</p>
<p><a href="https://www.nytimes.com/2022/03/08/business/economy/russian-oil-ban-economy.html">Sanctions</a> have helped pushed up Brent crude oil prices by more than 60 per cent since the beginning of the year, although they are not the only reason the price of oil is high. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-gasoline-prices-have-soared-to-record-highs-178707">Why gasoline prices have soared to record highs</a>
</strong>
</em>
</p>
<hr>
<p>In developed countries, including Canada, the increase in energy prices is the major driver of food inflation. The food supply chain from the production at the farm level to the transportation, processing, storing and eventually selling at retail, relies heavily on energy. In developing countries, the increase in energy prices does not have the same relative impact but it will further exacerbate the increase in food prices.</p>
<h2>The impacts felt most by the most vulnerable</h2>
<p>The Russian invasion of Ukraine has set off a series of direct and indirect supply shocks to commodity markets. The impacts of these shocks will vary with the degree of reliance on wheat and energy from these countries. </p>
<p>The most vulnerable are net importing food countries that are dependent on Ukraine. The <a href="https://www.ifpri.org/blog/how-will-russias-invasion-ukraine-affect-global-food-security">risk to global food security</a> in these regions can be mitigated to a degree by allowing food trade to continue. One means is to avoid sanctioning Russian food exports, and the other as advocated by <a href="https://www.fas.usda.gov/sites/default/files/2022-03/g7-extraordinary-meeting-statement.pdf">G7 agricultural ministers</a>, is for other countries to not use export bans that would restrict movement of food out of their country.</p>
<p>However, the only way to ultimately reduce the impact is stop the conflict in Ukraine and get wheat flowing again.</p><img src="https://counter.theconversation.com/content/178693/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alfons Weersink receives funding from the Ontario Ministry of Agriculture, Food and Rural Affairs, and the Canada First Research Excellence Fund Program. </span></em></p><p class="fine-print"><em><span>Michael von Massow receives funding from a variety of organizations including the Ontario Ministry of Agriculture and Food, Genome Canada, and Protein Industries Canada.</span></em></p>The Russian invasion of Ukraine will have global impacts far beyond the region directly involved in the fighting. Food prices will increase, and the effects will be felt by the most vulnerable.Alfons Weersink, Professor, Dept of Food, Agricultural and Resource Economics, University of GuelphMichael von Massow, Associate Professor, Food Economics, University of GuelphLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1788732022-03-11T16:31:16Z2022-03-11T16:31:16ZFrom soaring gas prices to another world war, economic sanctions can lead to dire unintended consequences<figure><img src="https://images.theconversation.com/files/451145/original/file-20220309-28-8dnupg.jpg?ixlib=rb-1.1.0&rect=35%2C8%2C5955%2C4140&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">People in the Russian city of St. Petersburg stand in line to withdraw U.S. dollars and euros from an ATM. Ordinary Russians faced the prospect of higher prices as western sanctions over the invasion of Ukraine sent the ruble plummeting. </span> <span class="attribution"><span class="source">(AP Photo/Dmitri Lovetsky)</span></span></figcaption></figure><p>Western governments have united to bring in <a href="https://www.bbc.com/news/world-europe-60125659">a number of serious economic sanctions against Russia in retaliation for its violence in Ukraine</a>, including the latest announcement that the United States is revoking Russia’s <a href="https://www.cnbc.com/2022/03/11/biden-will-push-to-end-russias-most-favored-nation-trade-status.html">“most favoured nation” status</a> that will impose new trade tariffs. The moves were not a surprise.</p>
<p>The U.S. and its western allies have increasingly turned to sanctions, investment bans, embargoes and other forms of economic warfare over the last two decades. </p>
<p>But sanctions and economic warfare give rise to unintended consequences. They can divert from diplomatic mediation and dialogue. They also carry a price for those applying the sanctions, as well as third parties who may be indirectly impacted by the sanctions.</p>
<p>The desire to use these financial tools is understandable, especially by the U.S. government, because it means avoiding armed conflict. After two decades of war in the Middle East and Afghanistan, economic warfare is more acceptable to war-weary western societies than boots on the ground.</p>
<p>Powerful nations often use economic warfare measures to avoid protracted or difficult diplomatic negotiations, or to weaken the target country for negotiations. Sometimes countries impose sanctions as a way to play for time or to strengthen their negotiating hand.</p>
<h2>Imprecise tools</h2>
<p>However, sanctions and economic embargoes are also imprecise tools — even the highly tuned interventions into bank accounts and financial flows which <a href="https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-programs-and-country-information/counter-terrorism-sanctions">the U.S. government developed after 9/11 to go after terrorist financing</a>. They also have spin-off effects, which may not be predicted beforehand.</p>
<p><a href="https://www.twai.it/articles/us-financial-statecraft-china-hong-kong/">Research finds that the unintended consequences of economic sanctions and financial warfare measures are difficult to predict</a> at the outset — and the more severe and encompassing the sanctions, the greater the unintended consequences. </p>
<p>Consumers in North America and Europe are seeing it now in surging gas prices. More inflation and supply problems are to come in western economies as the sanctions against Russia take effect. </p>
<figure class="align-center ">
<img alt="Farm machinery works on a large wheat field" src="https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451138/original/file-20220309-17-1n0wru9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Farmers harvest with their combines in a wheat field near the Russian village of Tbilisskaya in 2021. Russia and Ukraine combine for about a third of the world’s wheat and barley exports and provide large amounts of corn and cooking oils.</span>
<span class="attribution"><span class="source">(AP Photo/Vitaly Timkiv)</span></span>
</figcaption>
</figure>
<p>The developing world is also feeling the war’s impact on grain supply and the unintended effects of the sanctions in surging food prices and other commodities. Food shortages will once again destabilize societies in the developing world, as they did in the past with food riots in Egypt in 1977, 1984 <a href="https://www.theguardian.com/world/2017/mar/08/egypt-protests-we-want-bread-subsidy-cut">and as recently as 2017</a>.</p>
<h2>Food prices will be impacted</h2>
<p>Countries in Northern Africa and the Middle East <a href="https://www.theguardian.com/global-development/2022/mar/07/we-need-bread-fears-in-middle-east-as-ukraine-russia-war-hits-wheat-imports">are already on high alert as the war and wheat prices surge</a> and cut into their staple grain supply from Ukraine and Russia. <a href="https://mg.co.za/opinion/2022-02-28-south-africas-diplomacy-falters-over-russias-attack-on-ukraine/">South Africans are concerned about surging prices of energy and bread</a>, which will hit the poor especially hard even as they try to recover from COVID-19, and about the more than 200 South Africans (mainly students) fleeing Ukraine for safety. </p>
<p>But there are other inherent dangers. Over-reliance on sanctions and economic warfare measures have led to strategic complacency and the avoidance of negotiations on the part of the governments of the western nations. </p>
<p>The announcements of sanctions against Russia are coming fast and furious. Politicians are anxious to announce their latest punishment of Russian President Vladimir Putin, Russian oligarchs and the people of Russia. </p>
<p>As a Canadian diplomat I witnessed the intended and unintended effects of <a href="https://www.jstor.org/stable/43908921">U.S. sanctions on the assets of North Korean entities in a Macau-based bank in 2005</a>. I’m currently researching the unsuccessful use of U.S. financial sanctions on Hong Kong and China in response to <a href="https://www.nytimes.com/2020/06/30/world/asia/hong-kong-security-law-explain.html">the implementation of the National Security Law in Hong Kong</a>. I’m concerned the flurry of economic sanctions against Russia lack strategic clarity. Simply saying the sanctions are meant to punish Putin and Russian elites for their actions is not a serious strategy. </p>
<h2>How will impacts be measured?</h2>
<p>Other questions need to be answered: What mix of diplomatic tools are sanctions and economic warfare part of, and toward what end — what exact change in the target’s behaviour? When will we know that economic warfare has worked? How are governments tracking the effects, intended and unintended? When will the measures end, and how?</p>
<p>If the goal is a stalemate or to aid the Ukrainian effort to repel the forces back into Russia, how likely is that to be achieved given the asymmetry in the armed forces of the two sides? </p>
<p>Or is the goal even broader, such as destabilizing Russia to the point of regime change? That too could lead to unintended consequences, especially given the failed record of western governments in dealing with regime changes in smaller countries like Libya, Iraq and Afghanistan. </p>
<p>And what if the sanctions, <a href="https://www.reuters.com/business/finance/eu-excludes-seven-russian-banks-swift-official-journal-2022-03-02/">investment and SWIFT bans</a>, embargoes and arms transfers don’t work? Is there a point where the cost to human life is too high — in Ukraine or other places?</p>
<figure class="align-center ">
<img alt="Biden raises a finger as he makes a point during his announcement to increase sanctions against Russia." src="https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451141/original/file-20220309-22-1c1w1ef.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">U.S. President Joe Biden announces a ban on Russian oil imports on March 8, toughening the toll on Russia’s economy in retaliation for its invasion of Ukraine.</span>
<span class="attribution"><span class="source">(AP Photo/Andrew Harnik)</span></span>
</figcaption>
</figure>
<p>If the Russian military succeeds, would the economic punishments remain indefinitely? While some may make that argument, it would be the end of the globally integrated economy of the last 40 years, especially if China is somehow drawn into the conflict. </p>
<p>China would likely try to broker a cessation in the violence, but would not cease all financial transactions with Russia. That could lead to China developing alternatives to the SWIFT and U.S. dollar payment systems.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-china-could-become-a-mediator-in-negotiations-between-russia-and-ukraine-178736">Why China could become a mediator in negotiations between Russia and Ukraine</a>
</strong>
</em>
</p>
<hr>
<h2>The end of an integrated world economy?</h2>
<p>One of the truths of the world order since the 1980s is that the world was increasingly open and integrated — especially the world economy, but also socially to a large extent. </p>
<p>Social movements on the political left and right have raged against the globalized world. But there were no major wars between the military superpowers in the eight decades after the Second World War. </p>
<p>The world order is now being undone by all sides. </p>
<p>It is time for leading world powers to think seriously about how to return to diplomacy, as unpalatable as this may be at this point. Though it may sound tepid to call for mediation and dialogue, cooler heads are needed to work toward a ceasefire and to get serious and strategic about finding a negotiated solution in the Ukraine. Off ramps need to be found from the intensifying violence.</p>
<p>Sanctions, embargoes, financial bans and arms transfers with no negotiated end in sight is not the solution, tempting as they may be for western governments. Further escalation only leads to the unthinkable.</p><img src="https://counter.theconversation.com/content/178873/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gregory T. Chin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Over-reliance on sanctions and economic warfare measures have led to strategic complacency and the avoidance of negotiations on the part of the western governments.Gregory T. Chin, Associate Professor of Political Economy, Department of Politics, York University and former Canadian Diplomat, York University, CanadaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1788612022-03-11T13:21:33Z2022-03-11T13:21:33ZOil price shocks have a long history, but today’s situation may be the most complex ever<figure><img src="https://images.theconversation.com/files/451102/original/file-20220309-20-1jnkb6u.jpg?ixlib=rb-1.1.0&rect=7%2C7%2C5235%2C3482&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Gas prices at a Mobil gas station in West Hollywood, Calif., on March 8, 2022.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/EconomyGasPrices/038a2356f8cd49edafb721d00dc224ce/photo">AP Photo/Jae C. Hong</a></span></figcaption></figure><p>The world is in the grip of an oil price shock. In just a few months, prices have risen from <a href="https://www.nasdaq.com/market-activity/commodities/cl:nmx">US$65 a barrel to over $130</a>, causing fuel costs to surge, inflationary pressure to rise and consumer tempers to flare. Even before Russia’s invasion of Ukraine, prices were climbing rapidly because of roaring demand and limited supply growth.</p>
<p>Price shocks aren’t new. <a href="https://www.macrotrends.net/1369/crude-oil-price-history-chart">Viewed historically</a>, they are an integral part of oil market dynamics, not anomalies. They <a href="https://www.businessinsider.com/timeline-155-year-history-of-oil-prices-2016-12">have occurred since the birth</a> of the industry. </p>
<p>Many factors can trigger oil price shocks. They include large shifts in either demand or supply anywhere in the world, since oil is a global commodity. Shocks can also result from war and revolution; periods of rapid economic growth in major importing nations; and domestic problems in supplier countries, such as political conflict or lack of investment in the oil industry. Overall, the worst spikes have combined two or more of these factors – and that’s the situation today.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Since the 1970s world events have driven the price of oil below $20 per barrel and as high as $140 per barrel" src="https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=370&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=370&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=370&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=464&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=464&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451400/original/file-20220310-17-81hync.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=464&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Crude oil prices react to many types of geopolitical events, from weather disasters to wars, revolutions and economic growth or recessions.</span>
<span class="attribution"><a class="source" href="https://www.energy.gov/eere/timeline/timeline-brief-history-oil-prices-and-vehicle-technologies">U.S. Department of Energy</a></span>
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</figure>
<h2>50 years of ups and downs</h2>
<p>Global oil production began in the mid-1800s and <a href="https://ourworldindata.org/grapher/oil-production-by-country?time=earliest..2019&country=QAT%7EOMN%7ESAU%7ENOR%7EIRQ%7EUSA%7EARE%7ERUS%7EGBR%7EIRN%7EVEN">grew rapidly in the first half of the 20th century</a>. For much of that time, oil majors – companies like Chevron, Amoco and Mobil that were created after the Supreme Court <a href="https://www.britannica.com/topic/Standard-Oil">ordered the breakup of Standard Oil in 1911</a> – operated effectively as a cartel, maintaining production at levels that kept oil abundant and cheap to encourage its consumption.</p>
<p>This ended when Iran, Iraq, Kuwait, Saudi Arabia and Venezuela formed the <a href="https://www.opec.org/opec_web/en/about_us/24.htm">Organization of Petroleum Exporting Countries</a> in 1960, nationalizing their oil reserves and <a href="https://www.geoexpro.com/articles/2015/06/the-first-oil-shock">gaining real supply power</a>. Over the following decades, other nations in the Middle East, Asia, Africa and Latin America joined – some temporarily, others permanently.</p>
<p>In 1973, Arab members of OPEC cut their oil production when Western countries supported Israel in the <a href="https://www.britannica.com/event/Yom-Kippur-War">Yom Kippur War</a> with Egypt and Syria. World oil prices shot up fourfold, from an <a href="https://www.federalreservehistory.org/essays/oil-shock-of-1973-74">average of $2.90 per barrel to $11.65</a>. </p>
<p>In response, government leaders in wealthy countries introduced policies to stabilize oil supplies. These included finding more oil, investing in energy research and development, and creating strategic oil reserves that governments could use to mitigate future price shocks.</p>
<p>But six years later, oil prices more than doubled again when Iran’s revolution halted that country’s output. Between mid-1979 and mid-1980, oil rose <a href="https://www.brookings.edu/blog/order-from-chaos/2019/03/05/what-irans-1979-revolution-meant-for-us-and-global-oil-markets/">from $13 per barrel to $34</a>. Over the next several years, a combination of economic recession, replacing oil with natural gas for heating and industry, and shifting to smaller vehicles helped to <a href="https://www.cfr.org/timeline/oil-dependence-and-us-foreign-policy">mitigate oil demand and prices</a>. </p>
<p>The next major shock came in 1990 when <a href="https://www.econlib.org/archives/2014/06/who_caused_the.html">Iraq invaded Kuwait</a>. The United Nations imposed an <a href="https://digitallibrary.un.org/record/94221?ln=en">embargo on trade with Iraq and Kuwait</a>, which raised oil prices <a href="https://oilandenergyonline.com/articles/all/major-oil-market-crashes-history/">from $15 per barrel in July 1990 to $42 in October</a>. U.S. and coalition troops moved into Kuwait and defeated the Iraqi army in just a few months. During the campaign, Saudi Arabia increased oil production by <a href="https://doi.org/10.2307/2539161">more than 3 million barrels per day</a>, roughly the amount previously supplied by Iraq, to help dampen the increase and shorten the period of higher prices. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Smoke and flames rise from eight oil wells in the desert" src="https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/451117/original/file-20220309-15-q0jxos.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Oil well fires rage outside Kuwait City on March 21, 1991, in the aftermath of Operation Desert Storm. Iraqi forces set the wells on fire before being ousted from the region by coalition forces.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/oil-well-fires-rage-outside-kuwait-city-in-the-aftermath-of-news-photo/615294822">CORBIS via Getty Images</a></span>
</figcaption>
</figure>
<p>More disruptive price shocks occurred in 2005-2008 and 2010-2014. The first resulted from increased demand generated by <a href="https://www.cfr.org/timeline/oil-dependence-and-us-foreign-policy">economic growth in China and India</a>. At that time, OPEC was unable to expand production due to long-term lack of investment. </p>
<p>The second shock reflected the impacts of <a href="https://www.vox.com/2014/8/6/5975157/how-conflict-in-the-middle-east-is-making-gasoline-more-expensive">Arab Spring pro-democracy protests</a> in the Middle East and North Africa, combined with conflict in Iraq and international sanctions that Western nations placed on Iran to slow its nuclear weapons program. Together, these events pushed oil prices above $100 per barrel for a four-year stretch – the <a href="https://www.macrotrends.net/1369/crude-oil-price-history-chart">longest such period on record</a>. Relief finally came via <a href="https://www.bloomberg.com/quicktake/fracking?sref=Hjm5biAW">a flood of new oil from shale production in the U.S.</a>.</p>
<h2>A pefect storm in 2022</h2>
<p>Today, multiple factors are raising oil prices. There are <a href="https://www.eia.gov/todayinenergy/detail.php?id=50738#.">three key elements</a>: </p>
<ul>
<li><p>Oil demand has grown more rapidly than expected in recent months as countries emerged from pandemic lockdowns. </p></li>
<li><p>OPEC+, a loose partnership between OPEC and Russia, has not raised production at a commensurate level, and neither have U.S. shale oil companies. </p></li>
<li><p>Countries have drawn on stocks of oil and fuel to fill the supply gap, reducing this emergency cushion to low levels. </p></li>
</ul>
<p>These developments have made oil traders worry about looming scarcity. In response, they have <a href="https://www.energyintel.com/0000017e-eade-df96-a1fe-fbfebf6f0000">bid oil prices up</a>. It’s worth noting that while consumers often blame oil companies (and politicians) for high oil prices, these prices are <a href="https://www.thebalance.com/why-are-gas-prices-so-high-3305653">set by commodity traders</a> in venues such as the New York, London and Singapore stock exchanges.</p>
<p>Against this backdrop, Russia attacked Ukraine on Feb. 24, 2022. Traders saw the potential for sanctions on Russian oil and gas exports and bid energy prices even higher. </p>
<p>Unexpected factors also have emerged. Major oil companies including Shell, BP and ExxonMobil are <a href="https://theconversation.com/shell-bp-and-exxonmobil-have-done-business-in-russia-for-decades-heres-why-theyre-leaving-now-178269">ending their operations in Russia</a>. <a href="https://www.mckinseyenergyinsights.com/resources/refinery-reference-desk/spot-market/">Spot market</a> buyers have <a href="https://www.bbc.com/news/business-60584798">rejected seaborne Russian crude</a>, probably for fear of sanctions. </p>
<p>And on March 8, the U.S. and U.K. governments announced <a href="https://www.ft.com/content/2e0b1d84-e595-4c5a-be4e-928417b9c7cc">bans on imports of Russian oil</a>. Neither country is a major Russian buyer, but their actions set a precedent that some analysts and traders fear could <a href="https://www.aljazeera.com/economy/2022/3/8/bidens-posturing-on-russian-oil-risks-wider-conflict-analysts">lead to escalation</a>, with Russia reducing or eliminating exports to U.S. allies.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1501571322345934851"}"></div></p>
<p>In my view, this set of conditions is unprecedented. It reflects not just increased complexity in the global market, but also an imperative for energy firms – which already are under pressure from shareholder climate activists – to avoid further reputational damage and leave one of the most oil-rich countries in the world. Some companies, such as BP, are <a href="https://www.reuters.com/business/energy/britains-bp-says-exit-stake-russian-oil-giant-rosneft-2022-02-27/">abandoning assets worth tens of billions of dollars</a>.</p>
<h2>What could ease this shock?</h2>
<p>As I see it, the key players that can help curtail this price shock are OPEC – mainly, Saudi Arabia – and the U.S. For these entities, holding back oil supply is a choice. However, there’s no evidence yet that they are likely to change their positions. </p>
<p>Restoring the <a href="https://oilprice.com/Geopolitics/Middle-East/The-Real-Cost-Of-An-Iran-Nuclear-Deal.html">Iran nuclear deal</a> and lifting sanctions on Iranian oil would add oil to the market, though not enough to greatly reduce prices. More output from smaller producers, such as <a href="https://oilprice.com/Energy/Energy-General/Can-Non-OPEC-Producers-Jump-Into-The-Supply-Gap.html">Guyana, Norway, Brazil</a> and <a href="https://www.ft.com/content/913af3e8-1a6a-46d2-a108-48e1ef74514f">Venezuela</a>, would also help. But even combined, these countries can’t match what the Saudis or the U.S. could do to increase supply.</p>
<p>All of these uncertainties make history only a partial guide to this oil shock. Currently there is no way to know how long the factors driving it will last, or whether prices will go higher. This isn’t much comfort to consumers facing higher fuel costs around the world.</p>
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<p class="fine-print"><em><span>Scott L. Montgomery does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Price shocks are a feature of the global oil market, not a bug – and even when governments take many steps to grow supply or reduce demand, it can be years before prices ease.Scott L. Montgomery, Lecturer, Jackson School of International Studies, University of WashingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1776982022-03-10T15:20:56Z2022-03-10T15:20:56ZAlberta budget means Albertans are trapped on a relentless fiscal rollercoaster ride<figure><img src="https://images.theconversation.com/files/450212/original/file-20220306-83366-1ujbmy4.jpg?ixlib=rb-1.1.0&rect=41%2C0%2C4588%2C2857&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Alberta's approach to fiscal management involves a nauseating cycle of big spending followed by massive cuts — almost entirely due to the outsized influence of oil and gas revenues. The rollercoaster at the West Edmonton Mall is seen in this photo.</span> <span class="attribution"><span class="source">(Jerry Bowley/Flickr)</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Alberta Finance Minister Travis Toews recently delivered his fourth <a href="https://www.alberta.ca/budget-documents.aspx#22-23">provincial budget</a>. Due to the ongoing <a href="https://www.stalberttoday.ca/local-news/budget-2022-oil-price-rebound-to-help-balance-albertas-budget-says-toews-5099567">recovery of oil and natural gas prices</a>, the Alberta government is now forecasting surpluses after nearly a decade of deficits. </p>
<p>Those deficits reached a high of $17 billion in 2020-21, meaning the largest-ever turnaround in Alberta’s roller-coaster finances has just happened. </p>
<figure class="align-center ">
<img alt="A man stands speaking into a microphone at a podium. Another man sits beside him wearing a blue mask." src="https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450206/original/file-20220306-83652-i2dd41.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Alberta Premier Jason Kenney watches as Finance Minister Travis Toews delivers the 2022 budget in Edmonton in February 2022.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jason Franson</span></span>
</figcaption>
</figure>
<p>I’ve been following Alberta budgets for 40 years, both inside or outside government.</p>
<p>My most vivid Alberta budget memory was watching from the gallery as Alberta Treasurer <a href="http://www.revparl.ca/english/issue.asp?param=97&art=416">Lou Hyndman delivered a budget in the early 1980s</a>. As he progressed down the list of capital spending, each item was thunderously greeted by his fellow Progressive Conservatives pounding on their desks — especially when their constituency was mentioned. </p>
<p>This experience has left the indelible impression that politicians care much more about spending money than raising money. </p>
<h2>Oil prices drive every Alberta budget</h2>
<p>Have matters really changed since Hyndman delivered his budget? Not really. Every time Alberta’s energy-based economy goes into a tailspin, it’s because the price of oil has declined precipitously. </p>
<p>Predictable patterns have repeated over the past 40 years. Following the price decline in the ’80s, Peter Lougheed’s government <a href="https://reviewcanada.ca/magazine/2013/01/spending-like-theres-no-tomorrow/">raided the Heritage Fund’s investment income</a> and, when that wasn’t sufficient, started borrowing.</p>
<p>After Lougheed’s successor Don Getty retired, <a href="https://calgaryherald.com/news/politics/how-alberta-went-from-kleins-paid-in-full-years-to-record-debt-in-2021-budget">Ralph Klein reversed course, demonizing debt, taxes and public spending</a>. No consideration was ever given to developing other sources of revenue, <a href="https://www.cbc.ca/news/canada/edmonton/could-alberta-s-fiscal-future-include-a-provincial-sales-tax-1.6268968">like a sales tax</a>, to stabilize Alberta’s fiscal situation. </p>
<p>Two phases of Alberta’s fiscal response are seen repeated time and again:</p>
<ol>
<li>Borrow and draw down on financial reserves</li>
<li>Then cut spending and slash budgets</li>
</ol>
<p>Each time, as the broader Alberta economy suffers, so too do the province’s public services.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A grey-haired man reads a document." src="https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=467&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=467&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=467&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=587&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=587&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450207/original/file-20220306-56947-fq9jf5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=587&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Alberta Premier Ralph Klein reads over the budget during its presentation in the legislature in Edmonton in 2002.</span>
<span class="attribution"><span class="source">(CP PHOTO/Adrian Wyld)</span></span>
</figcaption>
</figure>
<p>Klein’s mantra was: “<a href="https://www.parklandinstitute.ca/media_albertas_finances_more_complex_than_we_have_a_spending_problem">We have a spending problem, not a revenue problem</a>.” This version of successive fiscal planning was popular — Klein won four successive majorities. But his success in the 2000s was mainly due to surging natural gas prices. </p>
<h2>The Notley years</h2>
<p>Fast forward to the collapse of oil prices in 2014-15 when a New Democratic government under Rachel Notley defeated the long-governing Conservatives led by the late Jim Prentice. </p>
<p>Like Lougheed and Getty before her, <a href="https://edmontonjournal.com/news/politics/economic-turnaround-a-2017-highlight-for-premier-rachel-notley">Notley resorted to large borrowing and tapping stabilization funds</a> to ease a deteriorating financial situation.</p>
<p>Resource revenues fell <a href="https://www.alberta.ca/government-and-ministry-annual-reports.aspx">to $2.8 billion from nearly $9 billion </a> in her government’s first fiscal year. As in the Getty era, economic diversification was hailed as offering a way out of the boom-bust cycle. </p>
<p>But also like Getty, Notley’s efforts to diversify the economy largely failed, although modest gains were made in the <a href="https://calgaryherald.com/business/local-business/ndp-government-unveils-grant-program-for-alberta-craft-brewers">craft beer</a> and in <a href="https://open.alberta.ca/publications/idmtc-program-information">digital-media arts</a> industries. And like her Conservative predecessors, Notley’s government provided grants to expand Alberta’s petrochemical industry.</p>
<figure class="align-left ">
<img alt="A blonde woman smiles behind a podium that says 'climate.'" src="https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450214/original/file-20220306-83137-4i3x4p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Notley unveils her government’s climate strategy in Edmonton in November 2015.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Amber Bracken</span></span>
</figcaption>
</figure>
<p>However, unlike Getty, Notley faced growing pressures for measures to address climate change. A government panel led by Alberta Business School economist Andrew Leach <a href="https://www.alberta.ca/climate-leadership-discussion.aspx#jumplinks-0">produced a report</a> that created a road map and rationale for a carbon tax. </p>
<p>Anticipating hostility to the tax, <a href="https://www.vox.com/2015/11/25/9801614/alberta-carbon-tax-revenue-neutral">Notley sought to characterize it as “revenue-neutral”</a> with money being redistributed to lower-income families. The report aimed to mollify oil executives by emphasizing the importance of maintaining Alberta’s industrial competitiveness alongside efforts to reduce emissions.</p>
<h2>Cycle repeats itself</h2>
<p>Phase 2 of the routine Alberta cycle — spending and budget cuts — is completing itself under the United Conservative Party government that’s held spending steady for several years.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A man speaks into a microphone at a podium with an Alberta banner." src="https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=445&fit=crop&dpr=1 600w, https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=445&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=445&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=559&fit=crop&dpr=1 754w, https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=559&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/450213/original/file-20220306-84943-q3wjl4.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=559&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Kenney gives a COVID-19 update in Calgary in February 2022.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Jeff McIntosh</span></span>
</figcaption>
</figure>
<p>Like Klein, Premier Jason Kenney regards the culprit of the province’s financial woes as spending, and enacted recommendations in <a href="https://www.alberta.ca/mackinnon-report-on-finances.aspx">the blueprint</a> offered by Janice MacKinnon, Saskatchewan’s former NDP finance minister. </p>
<p>MacKinnon, despite her NDP history, was a formidable fiscal hawk and after her political career, she helped produce a <a href="https://journalhosting.ucalgary.ca/index.php/sppp/article/view/42498">2017 report</a> recommending the Notley government attack the province’s spending problems by bringing Alberta’s per capita spending in line with Canada’s three biggest provinces. A key target was the high wages Alberta’s public servants supposedly were paid. </p>
<p>Predictably, these measures inflicted pain on the public service <a href="https://www.cbc.ca/news/canada/edmonton/alberta-innovates-layoffs-provincial-budget-1.5364183">through layoffs</a> and by <a href="https://edmontonjournal.com/news/politics/alberta-budget-2019-44-million-cut-to-hit-university-of-alberta">forcing institutions</a> like school boards or provincial agencies to cut services or staff. </p>
<p>Now, as with Klein, the boom has followed the bust and next year’s pre-election budget is expected to significantly ramp up spending and to patch up holes in the health and education system. There also may be talk of debt pay-down or adding to the government’s savings accounts. </p>
<h2>Quiet on the sales tax front</h2>
<p>For nearly 60 years, the Alberta government has not once run a surplus excluding resource revenue.</p>
<p>Economists have long advocated <a href="https://edmontonjournal.com/opinion/columnists/ken-mckenzie-herb-emery-and-ron-kneebone-albertas-spring-budget-should-shutdown-fiscal-rollercoaster">the introduction of a sales tax</a> to stabilize Alberta’s notoriously volatile resource revenue. </p>
<p>Regrettably, Toews failed to announce a full-scale review of all government revenue as <a href="https://www.youtube.com/watch?v=xAANL4nxVzQ">previously suggested</a>. </p>
<p>That means unlucky Alberta residents will continue to experience the thrills and chills of the province’s seemingly never-ending fiscal roller-coaster ride.</p><img src="https://counter.theconversation.com/content/177698/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Robert L. Ascah does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Every time Alberta’s energy-based economy goes into a tailspin, it’s because the price of oil has declined precipitously, and when it booms, it’s because the price has soared.Robert L. Ascah, Research Fellow, The Parkland Institute, University of AlbertaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1787662022-03-09T19:08:12Z2022-03-09T19:08:12ZHigh petrol prices hurt, but cutting excise would harm energy security<figure><img src="https://images.theconversation.com/files/450867/original/file-20220309-23-1m7r3df.jpg?ixlib=rb-1.1.0&rect=108%2C954%2C5067%2C2491&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span></figcaption></figure><p>Australian petrol prices are rising as Russia’s invasion of Ukraine pushes up global oil prices. It’s likely motorists will be paying more than $2.15 a litre for unleaded petrol within a few weeks.</p>
<p>In response, independent South Australian senator <a href="https://www.theaustralian.com.au/nation/politics/calls-for-cut-to-fuel-excise-to-address-high-cost-of-living/video/49c978114efa5cfaf12b80ae8ac75aa2">Rex Patrick</a> has called on the federal government to halve the fuel excise on petrol for 12 months. “Extreme petrol prices are an economic boa constrictor throttling household budgets,” <a href="https://www.rexpatrick.com.au/50_cut_in_fuel_excise_required">he said</a> this week. “We have to take the pressure off.” </p>
<p>The fuel excise is a fixed amount, currently set at 44.2 cents a litre. Halving it would therefore knock 22.1 cents off the price of petrol. </p>
<p>That would certainly offer some relief at the bowser, and to the economy. It would not, however, serve Australia’s economic and national interests in the longer term.</p>
<p>At a time when world events underline the importance of greater energy security, it would prolong our already alarming dependence on oil-based imports and undermine policies to shift the nation away from fossil fuels.</p>
<p>Calls to cut fuel tax arise whenever Australian petrol prices rise. This is despite Australian taxes – the fuel excise plus 10% GST – being among the lowest rates in the OECD and making little contribution to price increases. </p>
<p>All GST revenue is distributed to state and territory governments. The fuel excise is (theoretically) levied to pay for Australia’s road infrastructure. </p>
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Read more:
<a href="https://theconversation.com/what-russias-war-means-for-australian-petrol-prices-2-10-a-litre-177719">What Russia's war means for Australian petrol prices: $2.10 a litre</a>
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<p>In 2019-20 the government collected A$5.6 billion from petrol and about $11.8 billion from diesel (much of which was reimbursed through diesel tax rebates). </p>
<p>The net revenue from all fuel excises, according to the Australian Automobile Association, is about <a href="https://www.aaa.asn.au/fuel-excise-explained/">$11 billion</a>, a figure that hasn’t changed much for a decade. </p>
<h2>Undermining decarbonisation</h2>
<p>While making energy prices as cheap as possible does have some short-term economic logic, cutting the fuel excise would undermine the government’s longer term strategic goal to decarbonise the economy. </p>
<p>This is important both for Australia to meet its international obligations to take action on climate change and to look after the narrower national interest of preparing the Australian economy to compete in a carbon-constrained world.</p>
<p>Shifting away from fossil fuels to electric (and some hydrogen fuel-cell) vehicles is a key part of this. The Morrison government has acknowledged this with a target of 30% of all new car sales being electric by 2030. (Electric vehicles made up just under <a href="https://www.theguardian.com/environment/2022/jan/31/new-electric-vehicle-sales-triple-in-australia-with-tesla-outstripping-other-makers">2% of new car sales</a> in 2021.) </p>
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Read more:
<a href="https://theconversation.com/as-petrol-prices-rise-will-carbon-emissions-come-down-178024">As petrol prices rise, will carbon emissions come down?</a>
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<p>While the government has committed $250 million to its <a href="https://www.industry.gov.au/data-and-publications/future-fuels-and-vehicles-strategy">Future Fuels and Vehicles Strategy</a> to help achieve the target, its policy mostly depends on low-emissions vehicles achieving “<a href="https://www.industry.gov.au/sites/default/files/November%202021/document/future-fuels-and-vehicles-strategy.pdf">pricing parity</a>” with internal combustion engines by mid-decade, and for market forces to do the rest.</p>
<p>Slashing the fuel excise won’t do anything to help this plan become reality. It would also undermine state and territory government spending on policies to encourage the uptake of electric vehicles, <a href="https://www.theguardian.com/environment/2021/nov/13/thinking-of-buying-an-electric-car-heres-what-you-need-to-know-about-models-costs-and-rebates">through incentives</a> such as stamp-duty waivers, free registration and rebates.</p>
<h2>Taking energy security seriously</h2>
<p>Moving away from fossil fuels is critical for addressing Australia’s growing energy insecurity. This entails two things: uninterrupted availability and affordability. </p>
<p>They are issues Senator Patrick cares about. </p>
<p>In <a href="https://www.news.com.au/technology/environment/sustainability/bob-katter-joins-forces-with-greens-crossbench-mps-and-senators-to-fight-for-fuel-security/news-story/3b037d43292b5ca4607aceadcef805ab">mid-Febuary</a> with Greens leader Adam Bandt and independentrs Andrew Wilkie and Bob Katter he hopped aboard an Australian-built electric bus for a photo opp in front of Old Parliament House.</p>
<p>Energy security doesn’t get much attention during normal times, but current events have underlined the dangers of being dependent on foreign supplies. </p>
<p>As Prime Minister Scott Morrison said this week, the world has entered a period of “<a href="https://www.afr.com/policy/foreign-affairs/scott-morrison-is-in-his-political-element-20220307-p5a2ji">profound strategic challenge and disruption</a>”. </p>
<p>It is at the mercy of the international market and global supply chains for our supply security and fuel affordability.</p>
<p>Australia’s dependence on oil imports has been growing for <a href="https://theconversation.com/australias-growing-oil-imports-are-an-energy-security-issue-7749">at least a decade</a>. </p>
<p>Closure of oil refineries along with declining oil production means we now import more than 90% of our needs. Yet we have abundant renewable resources to generate electricity and power low-emissions vehicles. </p>
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Read more:
<a href="https://theconversation.com/explainer-what-is-energy-security-and-how-has-it-changed-102476">Explainer: what is energy security, and how has it changed?</a>
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<p>The solution to consumers being hostage to foreign oil supplies and volatile global prices will not come from slashing the fuel excise. </p>
<p>It will come from reducing demand for oil-based fuels through policies that promote local energy generation and switching to low-emissions vehicles – like the electric bus that Patrick sat in a just few weeks ago.</p><img src="https://counter.theconversation.com/content/178766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vlado Vivoda does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Proposals to cut Australia’s fuel excise will prolong an already alarming dependence on oil-based imports and undermine policies to shift the nation away from fossil fuels.Vlado Vivoda, Senior Lecturer in Strategic Studies (Australian War College), Deakin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1778292022-02-25T03:14:00Z2022-02-25T03:14:00ZHow Russia’s invasion of Ukraine will ripple through the global economy and affect Australia<p>When Vladimir Putin became the <a href="https://russia.embassy.gov.au/mscw/relations.html">first Russian leader</a> to visit Australia – for the 2007 APEC summit in Sydney – I had a chance to ask him what he thought of Australia.</p>
<p>“I never think of Australia,” he replied. </p>
<p>Putin has probably not thought of Australia much since, apart from the fuss we made over Russian-backed rebels in Ukraine shooting down Malaysian Airlines MH17 in 2014, and his visit to Brisbane in 2014 for a G20 leaders summit. </p>
<p>Russia and Australia have limited economic ties. But Russia’s invasion of Ukraine will ripple through the global economy, reaching as far as Australia. Russia’s actions are already affecting things like petrol prices. </p>
<p>More significantly Putin’s belligerence could further destabilise our already fraught relationship with China, our most important trading partner. </p>
<p>So Australia certainly has reason to think about Putin’s actions now.</p>
<h2>Russia’s crucial role in the global economy</h2>
<p>Measured by gross domestic product, Russia is the world’s 11th biggest economy, just behind South Korea and in front of Brazil. Its 2020 GDP of US$1,646 billion wasn’t much bigger than Australia’s (in 13th spot, with US$1,610 billion).</p>
<p>But Russia matters to the global economy because, like Australia, it is a major global supplier of natural resources such as oil, gas, coal, metals and wheat.</p>
<p>Disruption of these supplies could happen through Western sanctions on Russia, or through Russia cutting off supplies – or both. </p>
<p>The intention in either scenario is to punish the other side. The effect on the global economy, already threatened by inflation and COVID-related supply side shocks, will be the same.</p>
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Read more:
<a href="https://theconversation.com/what-russias-war-means-for-australian-petrol-prices-2-10-a-litre-177719">What Russia's war means for Australian petrol prices: $2.10 a litre</a>
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<h2>Expect international price rises</h2>
<p>Russia is also a major global supplier of metals such as aluminium and palladium, a rare and expensive metal used in catalytic converters to reduce toxic exhaust emissions from cars and other vehicles. </p>
<p>Palladium has other important uses too, including in hydrogen fuel technology. Russia accounts for about 40% of global supply. </p>
<p>Sanctions banning Russian imports will naturally reduce global supply and increase the prices of these resources, as well as the products made from them. </p>
<p>How much of an inflationary effect this causes will depend on how much other suppliers increase their output, or whether Russia can increase sales to other buyers not participating in sanctions. China, for example, has ended all restrictions on <a href="https://www.scmp.com/economy/china-economy/article/3168278/ukraine-crisis-deepens-china-lifts-all-wheat-import">wheat imports from Russia</a></p>
<p>Putin has built strong ties <a href="https://www.wsj.com/articles/as-oil-nears-100-saudis-snub-u-s-stick-to-russian-pact-amid-ukraine-crisis-11645015415">with Saudi Arabia</a>, Iran and other oil-producing and non-democratic states as a bulwark against the West. So replacing Russian supplies and enforcing sanctions effectively won’t be easy.</p>
<h2>Europe’s vulnerability</h2>
<p>The European Union is particularly vulnerable to supply shocks, due to its heavy reliance on <a href="https://ec.europa.eu/eurostat/cache/infographs/energy/bloc-2c.html#carouselControls?lang=en">energy imports</a>, with 41% of the natural gas and 27% of the crude oil it consumes coming from Russia. </p>
<p>For Germany, Europe’s economic powerhouse, about 34% of oil imports and 35% of its gas imports <a href="https://www.cleanenergywire.org/factsheets/germanys-dependence-imported-fossil-fuels">come from Russia</a>. This makes the German government’s decision to halt the Nord Stream 2 gas pipeline being laid in the Baltic Sea between Russia and Germany a gutsy call. </p>
<p>Given the central role of German manufacturing to European supply chains, disruptions to its energy supply will have major global economic implications. </p>
<h2>The biggest risks for Australia</h2>
<p>In the very short term, there may be some upsides for Australian exporters, such as wheat farmers. </p>
<p>Russia is the world’s biggest wheat exporter and Ukraine, long known as Europe’s bread basket, is the fifth (<a href="https://www.worldstopexports.com/wheat-exports-country/">Australia is sixth</a>).</p>
<p>The likely disruption to these supplies can be expected to increase the world wheat price, as happened in 2014 when Russia <a href="https://www.theguardian.com/business/2014/mar/03/ukraine-crisis-crimea-hits-price-wheat-corn">annexed Crimea</a>. </p>
<p>Australia is also a <a href="https://www.statista.com/statistics/217856/leading-gas-exporters-worldwide/">major natural gas exporter</a>. However, because it exports that gas by ship (as liquefied natural gas) rather than through pipelines, there are constraints on it increasing exports in the near term. </p>
<p>So some Australian exporters who compete with Russian suppliers should benefit from higher prices in the short run. But these benefits will soon be overrun by the adverse impact of global economic disruption. </p>
<p>The biggest risk to Australia, though, is if China decides to follow Russia’s lead. </p>
<p>We saw at the Beijing Winter Olympics the warming of what has historically been a frosty Sino-Russian relationship. Putin and Xi Jinping have much in common. </p>
<p>If Xi sees the West being divided and weak over Ukraine, as it was over Afghanistan, then he may make matters tougher for Taiwan. This would jeopardise Australia’s trade with China. </p>
<h2>What else can be done?</h2>
<p>All the signs are that Putin is prepared to ride out sanctions, gambling that he has enough reserves to tough them out or enough friends to undermine their effectiveness. </p>
<p>What else can be done? </p>
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Read more:
<a href="https://theconversation.com/what-can-the-west-do-to-help-ukraine-it-can-start-by-countering-putins-information-strategy-177912">What can the West do to help Ukraine? It can start by countering Putin's information strategy</a>
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<p>One option is a strong economic strengthening of Ukraine through trade and infrastructure measures. This could include the European Union granting Ukraine preferential trade and investment deals, and the Western allies assuring it favourable supply of natural resources. </p>
<p>Russia may like to intimidate, but it doesn’t have the economic strength of a united opposition, including the US, European and Asia-Pacific nations.</p>
<p>There may not be an immediate military solution, nor a neat diplomatic fix. But the economic dimensions to the crisis may be more in favour of Ukraine than first meets the eye.</p><img src="https://counter.theconversation.com/content/177829/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tim Harcourt does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Despite limited direct economic ties, Russia’s invasion of Ukraine has important consequences for Australians too.Tim Harcourt, Industry Professor and Chief Economist, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.