Energy Economy

Ukraine War Could Cause Huge Oil Price Spike

It has been over a year since the near-collision of Israel and Iran, then in the midst of enhancing its nuclear stockpiles, drove oil prices up. As Ukraine’s Crimea region is invaded by Russian troops, the chances that oil prices will rise, and rise sharply, due to a regional conflict are back again.

It takes very little in terms of global political conflicts, weather, or tightened supply to press the price of crude higher. One big hurricane in the Gulf of Mexico, racing toward Texas refineries can trigger it. So can any hint that OPEC might throttle supply. Tensions in the Middle East seem to affect oil prices almost annually, if not more often.

Russia supplies much of the oil and natural gas for Europe. In September 2013, a dispute between Russia and Belarus caused anxiety about the export of crude by the huge nation. Europe has no easy way to replace this supply. If the West imposes sanctions on Russia over its actions in Ukraine, Russia may retaliate with a cut in oil and gas exports to undermine Europe’s resolve.

The question is how much a war between Russia and Ukraine would move oil prices higher. There is no formula to count it. However, the more violent the conflict, the more likely that the move upward would be sharp

Crude oil in the United States currently trades at about $102 a barrel. It has bounced between that level and $90 for a year. So far, the $100 price has not effected gas, oil, and petrochemical prices enough to dent the economies of the developed nations. If the 2008 oil spike, which pushed crude above $120 a barrel for about three months, is any indication, GDP among these countries could be hurt by much higher prices. The victims would range from drivers to transportation companies and airlines. And the ripple caused by high petrochemical prices, which effect a broad range of industries, is too large to calculate.

Much higher oil prices are on the way if the situation in Ukraine gets much worse. Global GDP, the recovery of which is still fragile, probably faces a new hurdle.