Oil prices soared past US $100 a barrel last week to hit their highest level for more than eight years after Russia launched military operations of Ukraine. The rising global tensions in Ukraine have caused oil prices to surge and the stock markets to crash nearly in all countries around the world.
Russia is the second biggest exporter of crude oil and is also the world’s largest natural gas exporter. Europe gets nearly a third of its oil and around 40% of its gas from Russia, much of it flowing through pipelines across Ukrainian territory. Small wonder then those prices are shooting up. Supplies from Russia do not appear to have been affected ? yet. But the fear that they will be, and that there could be a scramble for other resources, is pushing up costs.
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The political and military turmoil
Russian President Vladimir Putin’s deployment of troops to separatist areas Donetsk and Luhansk in Ukraine has triggered a huge diplomatic and economic crisis. While the West has termed it a blatant violation of international law, the rising global tensions and threat of invasion in Ukraine have caused oil prices to surge and the stock markets to crash.
The spike has been driven primarily by fears of supply side disruptions as the threat of Russian military actions in Ukraine looms large following Putin’s deployment of troops to separatist areas. An eventual all-out Russian military action in Ukraine could not only disrupt crude supplies globally, but also lead to sanctions by the United States of America (USA) and Europe.
“In the worst-case scenario – such as an all-out armed conflict between Russia and Nato forces – oil prices could skyrocket, acting Seychelles Petroleum Company (Seypec) chief executive Sarah Romain told Seychelles NATION.
“Even if this does seem to be purely geopolitical risk pricing, it is an immediate worldwide fear of an actual loss of barrels on all markets. I think based on the momentum we are seeing, unless we see a major pullback in Russian military moves, we likely will go well over the US $100 per barrel,” added Mrs Romain.
Why has crude jumped?
There is an overall concern over the growing imbalance between demand and supply following the recent geopolitical events. The USA and other Western nations have already responded with sanctions – driving investor concerns that Russia could respond by halting oil exports. In response to Russia’s recent military action, European Union leaders said they would put more sanctions in place on Russia. These sanctions on Russia, also raise the prospect of disruption of agricultural products and raw materials from those countries.
“This is a very simple economic principle as when supply from Russia and Ukraine will be drastically reduced, then the markets will surge as demand will not be met,” said acting chief executiveRomain.
“The Western countries which are very huge importers of crude will automatically switch to producing countries in other regions of the world like the gulf countries, Africa and South America. This means that all oil trading floors will be in turmoil sending prices even higher,” she added.
As the conflict drags on, the economies of all developed countries will suffer a severe hit just at a time when they were raising up painfully from the Covid-19 pandemic. The relaunch of the economy will be severely impeded by the price of crude oil which is a major commodity ? the economic machine of all countries.
The biggest economic hit would come from disconnecting Russia’s banking system from the international Swift payment system, but that could also affect USA and European economies.
Seychelles hugely affected
High crude oil prices contributed to the increase in motor gasoline and gas oil prices during these past weeks in Seychelles and it will continue that trend considering the world events described earlier. The country is watching helplessly to this oil price hurricane hitting the world at the beginning of this year. The repercussions of the barrel at higher prices will be felt in the coming weeks when new stocks are received from overseas and delivered to the local users.
Motor gasoline is now at its highest level since April last year. It would not be a surprise to see the R22.00 mark be attained and even surpassed in the coming weeks. Gasoil too has been hit by this international turmoil and is already well over R22.00. Since the beginning of the year, the motor gasoline price on global market has gone up by 30%, gas oil by 30% and fuel oil by 26%. But as Fig.3 shows, the price of motor gasoline in Seychelles is still faring well compared to other countries in the Indian Ocean region. Madagascar has a lower tax structure within their fuel pricing whilst Mauritius has a subsidy to protect from surges – and both countries are on the verge of reviewing pump prices on the high.
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“As usual, it is our mission to keep the prices at the pump as low as possible, Mrs Romain stated. “There is not a cent of complacency in our price fixing mechanism as we keep our local costs always stable with the excise duty remaining constant. Unfortunately, as a non-producing and importing country, we suffer the toll of soaring international oil prices.”
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With a real risk of market becoming unsustainably dysfunctional, motorists and other energy users must rely on their capacity to limit their consumption and compensate for the rise of their purchases. This will have a double-fold advantage of reducing household bills but also limiting emissions thus embracing the energy transformation everybody is calling for. Users are also helped these days by a US dollar (USD) exchange rate to the rupee which is relatively stable, and which does not add any other burden on the import prices of our fuel products.
Source: Seychelles Nation
