The True Impact of the Global Energy Crisis

How the ongoing Russia-Ukraine conflict is impacting more than just oil

W. H. R. Johnston

Despite the lack of progress in the Russian invasion of Ukraine, the depleting Russian soldier morale, and the united stance against Russia by many countries, the Kremlin seems unwilling to budge, and have in turn created a global energy crisis. 

Although many factors have contributed to the supply shortage of oil in recent years, most notably COVID-19, the Russia-Ukraine conflict has drastically inflated the issue, resulting in the exponential increase in oil prices around the world. 

Europe’s pre-invasion reliance on Russian oil was substantial, with many countries importing more than 35% of their oil from Russia. However, since the invasion of Ukraine, restrictive policies on Russian exports have been adopted by the European Union, and in the sixth package of sanctions, a partial oil embargo has been put in place which is set to ban all crude oil and petroleum imports from Russia by January 2023.  

Obviously, this supply shock has had major price implications throughout the world, with petrol prices rising approximately 30% in Australia over the past 6 months. However, now that governments and consumers have been given time to adjust to these new circumstances and adapt, it is expected that through the second half of the year, there will be a downward trend in petrol price, with significant drops already occurring in the UK, yet it is not completely clear how much of the price reduction will be passed on to the consumer from the large oil companies who are currently making record profits as a result of this price hike.  

Additionally, the energy crisis has impacted many other sectors through its altercation of aggregate consumer spending and, subsequently, is largely responsible, with a number of other factors, for the significantly increased cost of living. This resulted in many countries experiencing extremely high inflation, with a 5.1% increase in the CPI, price rises have become evident in all consumer activity, be it in grocery shopping, entertainment, or even public transport. With high inflation being prevalent in many national economies, there is a great chance that recession could soon follow, with many countries including the United States, Canada, the UK, Germany, Japan, South Korea and even Australia expected to experience recession by mid-next year. 

Therefore, despite the gradual recovery from the energy crisis that looks to be on the cards for the next 6-12 months, its impacts on the rest of the economy will surely be felt by the everyday consumer for quite some time due to the increased cost of living and expected decrease in economic activity.