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Russia-ukraine conflict geopolitical turmoil hit energy prices. How will China respond

2022-06-27 H:12:17

Global geopolitical game is an important factor affecting energy price fluctuation. Russia plays a pivotal role in today's international energy market, is an important energy producer, exporter consumer. Therefore, the conflict between Russia Ukraine also has a violent impact on the global energy market, then has different degrees of impact on countries around the world.

Global geopolitical Game energy prices

Geopolitical rivalries can result in conflict in energy-producing countries, resulting in reduced energy production export restrictions, such as destruction of production facilities embargoes. These conflicts will also inhibit investment in energy development in the medium long term, resulting in a decline in current expected future energy supply a rapid rise in international energy prices. Given the supply concentration of different energy varieties regional differences in geopolitical risk, crude oil prices are generally more affected by geopolitical conflicts, followed by natural gas prices, coal prices are less affected.

A review of the historical data of crude oil price fluctuations shows that the 1970s to the 1990s, the fluctuations of crude oil prices were mainly affected by some geopolitical conflicts on the supply side, such as wars in the Middle East. Since the beginning of this century, with the expansion of global economy the increase of energy demand, the pull role of the demand side has become more more important, local geopolitical conflicts have played a decisive role in energy prices.

The United States, Saudi Arabia Russia are the world's top three crude oil markets. They are the top three producers top three exporters, Saudi Arabia Russia have more influence on the supply side than the United States. The total import volume of the United States is larger than the export volume, it influences the global crude oil market the demand side. Saudi Arabia Russia are the most important forces influencing the global crude oil market the supply side, which is also a basis for the formation of OPEC+. In natural gas, Russia plays an even bigger role in global markets. It is the world's second largest natural gas producer the world's largest natural gas resource exporter. Overall, it is no exaggeration to say that Russia plays a significant role at the supply end of the global energy market.

Russia plays an important role in the global energy market, its economy is heavily dependent on energy. Fuel has accounted for more than half of Russia's merchandise exports over the past decade; Oil gas accounts for more than 40 percent of Russia's fiscal revenue. The fluctuation of Russian commodity export fiscal revenue is mainly due to the fluctuation of energy prices.

The European Union has struggled to muster the resolve to impose lethal sanctions on Russia's energy sector trade, in part because Russia other European countries are so closely interdependent in the energy sector. Twelve European countries rely on Russia for more than half of their gas imports, five of them rely entirely on Russia. Eight of the top ten destinations for Russian crude exports are European countries. Europe accounts for about half of Russia's crude oil exports about three-quarters of its natural gas exports.

The russia-Ukraine conflict the corresponding sanctions, coupled with the uncertainty of the future, led to the rapid rise of oil gas other bulk energy commodity prices, showed a high volatile situation. Both WTI Brent are at their highest since August 2008, gas prices, which soared after the conflict, have since fallen back, but are still more than 100% higher than a year ago. The impact on gas prices is particularly acute because the conflict is between major gas consumers producers. Gas prices are likely to remain high as Europe is unlikely to make up the shortfall any time soon in any other way.

In an effort to stabilize oil gas prices, the United States has worked with other countries to release strategic petroleum reserves increase LNG exports to secure supplies. Countries like Norway have also increased production, but this is still a small dent in global energy supplies. On the other hand, as energy prices rise, there are also some countries that have become transit points for Russian energy. India, for example, has significantly increased its imports of Crude oil Russia, which it then refines re-exports to make money. Poland, for example, stopped importing natural gas directly Russia because of the ruble settlement ban, but in fact it imports natural gas Germany in reverse order, meaning it buys Russian gas through Germany as an intermediary.

The impact of energy price Fluctuation on Europe America under the Background of Russia-Ukraine conflict

The conflict between Russia Ukraine is taking place right on Europe's doorstep, there is no doubt that the impact on European countries is direct. On June 2nd, in a surprise move, the European Union finally agreed to a sixth round of sanctions targeting the oil trade, banning 75% of Russian oil imports immediately extending the ban to more than 90% by the end of the year. But neither Brent nor WTI rose more than 2% on the day the sanctions were announced, suggesting that the sanctions have really hurt Russian crude exports.

Because there are a large part of the country in the world do agree with sanctions on Russia's energy exports, but when Russia's oil supplies, other countries have neither the ability nor intend to rapidly increase production make up the supply gap, so when the eu itself to reduce oil imports to Russia, they need to buy oil Africa, South America the Middle East, Russian oil is needed to replace the share of oil bought by Europe. a global perspective, such partial sanctions will change the supply of oil. But it would change the way oil is traded raise the cost of global trade.

These sanctions measures of European countries did really hit the lifeblood of Russia's national economy, but they made themselves into a dilemma. For example, the continued rise in oil gas prices caused by sanctions has increased the pressure of economic stagflation under the epidemic, which has plunged many low - middle-income families into the crisis of energy poverty. In addition, as the overall inflation continues to rise, it will also trigger the intensification of social conflicts in some countries. In The UK, for example, inflation hit 9% in April, while in Germany it hit a recent high of 7.9% in May.

In terms of the impact of higher energy prices alone, the US is no less affected than the European region. Estimates show that the increase in energy prices could cost households an average of more than $600 in additional spending. About 36% of the $600-plus extra cost comes higher gasoline prices. In addition, americans are paying extra for utilities, food, chemicals medical services.

In addition to the impact on the general price level household spending, the rise in oil prices will also have a significant negative impact on the overall economic growth of the United States, especially the post-epidemic economic recovery. In the process of rising oil prices, the US oil industry can benefit to some extent, but the rise in oil prices will also be transmitted to the overall economy, bringing negative impact on other industries. It found that when oil prices rose $90.2 to $107.7 a barrel, U.S. economic growth would drop by about 0.21%.

The impact on China's energy security macroeconomic operation

The implications for energy security can be summarized in three aspects. First, russia-Ukraine conflict will increase China's energy import cost by affecting energy prices. Second, while western countries are imposing energy financial sanctions on Russia, China is faced with a situation that needs to be dealt with prudently. We should only ensure the safety of energy imports, but also avoid collateral sanctions. Third, Europe's experience lessons remind us that excessive dependence on specific supply transportation channels, even energy varieties, will bring significant hidden dangers to energy security. Therefore, diversification is still a must in the formulation of China's future energy security strategy.

In view of the impact of this round of price fluctuations on China's macroeconomic operation, we find that, similar to other economies, the rise in energy prices will also spread to China's enterprises residents through the economic structure, resulting in a universal impact. In addition, we took into account the differences among residents with different incomes, private car ownership consumption structure in China, so we focused on the analysis of the heterogeneous impact on residents with different incomes. The corresponding energy price scenario is set based on China's energy import structure.

The rise of energy prices will lead to the increase of production costs in various industrial sectors in China, among which the two most affected sectors are undoubtedly oil refining gas industry. In addition, the rise of energy prices will also have a significant impact on the production costs of transportation, mining, chemical supplies other industries to a certain extent.

Through product price changes, energy price increases will also be transmitted to the residential sector, resulting in additional burden of living costs of residents. More than half of the extra cost also comes gasoline, which accounts for about 15% of the extra cost per household. In addition to gasoline consumption, household spending will increase through food, chemicals, gas transportation.

How to deal with energy price volatility caused by geopolitical turmoil

To sum up the impact of the Russia-Ukraine conflict, it can be divided into five aspects. First, the conflict between Russia Ukraine has intensified the turmoil in the energy market, raised energy prices affected global energy security. Second, the energy price shock triggers the rise of global commodity prices, resulting in a global cost of living crisis, which further leads to the contraction of household wealth the exacerbation of poverty. Third, these increases in inflation in the West have also led to a rise in popular discontent, which has posed a dilemma for politicians. Fourth, multiple rounds of sanctions counter-sanctions have disturbed global markets. Fifth, in the long run, the Russia-Ukraine conflict will serve as a catalyst for the development of clean energy in Europe promote the global energy transformation process.

On the first day of the outbreak of conflict, many western countries have announced sanctions against Russia's rapid, goal is to hope that through these sanctions countries will Russia out of the global financial trading system, lead to rapid capital outflows in Russia, the Russian economy is a major blow, forcing Russia to stop the conflict as soon as possible. The first round of sanctions did lead to a rapid fall in the rouble's value in the short term, 75 to 150 to the dollar. But then Russia responded with sharp interest rate hikes ( 9.5% to 20%), capital controls, forced foreign exchange settlements ruble settlements for gas. These counter-measures have turned the rouble into the world's outperforming major currency this year, up more than 20% so far even before the conflict. In fact, the outcome of these sanctions counter-sanctions seems to have been predetermined the start, because European sanctions against Russia do completely ban Russian energy exports, such loopholes have allowed exports to leak. Energy trade is the lifeblood of Russia's national economy, without strict sanctions on energy naturally cannot cause a fundamental blow to Russia's economy.

So how should the country deal with future energy price fluctuations caused by such geopolitical conflicts? First, we should correctly recognize the necessity importance of strategic energy reserves, form a trinity of government reserves, corporate social responsibility reserves production operation stocks as soon as possible, improve the strategic energy reserve capacity. Second, we need to increase the production of oil, gas non-fossil fuels, increase energy investment increase energy self-sufficiency. Third, we need to steadily promote the transformation of traditional energy sources, focus on coordinating the transformation the energy relationship, make steady orderly progress towards the goal of dual carbon emissions, guided by reducing carbon emissions without reducing productivity ensuring power supply. Fourth, we need to accelerate the development of new energy further increase the proportion of diversified energy sources. Fifth, we need to adhere to the concept of energy conservation, implement a comprehensive conservation strategy, change the extensive mode of energy production, continue to reduce energy resource consumption per unit of output.

In terms of foreign policy, we should strengthen energy cooperation with neighboring countries actively participate in international governance. Adhering to the concept of a community with a shared future for mankind, it will forge global strategic cooperation alliances at different levels in different fields under the principles of mutual respect, equality mutual benefit, win-win cooperation candid treatment. For example, with regard to the Belt Road Initiative, we need to deepen energy exchanges, strengthen cooperation in all areas of energy, build transnational oil gas pipelines a global energy Internet. China its neighboring countries regions have established sound cooperative relations of long-term stability, interdependence, mutual benefit closer cooperation in the field of energy. In addition, we should follow our national interests in formulating policies. On the one hand, we should keep the overall direction of China-Russia energy cooperation stable ensure long-term stability of the cooperation. On the other hand, we should also be good at making use of different interests of different countries in the Conflict between Russia Ukraine to achieve cooperation. After Z, we should accelerate the diversification of energy trade settlement forms, including but limited to the exploration of RMB pricing model.

(Chen Zhanming is professor Associate Dean of School of Applied Economics, Renmin University of China, Chen Qian is a graduate student of School of Applied Economics, Renmin University of China)

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Source: International Gas Network

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