The past week has been dominated by news relating to a ban on imports of Russian fossil fuels and surging oil prices. With over 90 per cent of natural gas consumed in the euro area being imported, these developments are set to dampen economic activity and worry investors.

On Monday, oil prices, namely Brent crude oil, rose to its highest levels since July 2008, as indicated in the accompanying chart. This rise was due to several factors. Over the past week, the US and its European allies were looking at banning imports of Russian oil in an effort to isolate Russia from the global economy.

Moreover, there were talks to revive Iran’s 2015 nuclear deal with world powers, and the interruption of Libya’s El Feel and Sharara oilfields, resulting in the loss of 330,000 barrels a day according to National Oil Corporate.

In the past year alone, Brent crude’s price has risen 80 per cent. Higher energy costs push up consumer prices, thereby pressuring global growth.

In the euro area, natural gas is the most important source of energy in the manufacturing sector and the second most important primary energy resource, after petroleum-based products. Increases in oil prices raises pet­roleum prices, which impact both the consumption channels and intermediate goods channel.

In the former, higher energy prices increase electricity bills, thereby reducing households’ real disposable income and purchasing power, which have an impact on private consumption. As oil and gas are used as an input in the production processes of most companies, such increase would also have an impact in the intermediate goods channel.

While many industrial sectors, such as mining, metal and minerals, depend substantially on oil, other sectors may use electricity and gas indirectly; these include firms in food production, textiles, machinery and equipment and also services sectors such as accommodation. Furthermore, costs are also being pushed up as wheat prices are also on the rise, as Ukraine and Russia are top global crop suppliers.

Governments may use this opportunity to continue pushing businesses and consumers towards clean energy alternatives- Noelle Micallef

Fears of Russian aggression in Eastern Europe along with concerns about the hawkishness of the Federal Reserve has once again given rise to stagflation worries. Stagflation occurs when an economy goes through a period of high inflation and slow growth. The current geopolitical environment has increased investors’ concern relating to the Fed tightening monetary policy to control inflation.

According to FedWatch, a few weeks ago, investors were expecting the Fed to raise rates from zero to 1.75 per cent by February 2023. But analysts have now revised expectations to an increase of 1.5 per cent in the same period. 

Policymakers are becoming increasingly aware of the need to reform supply and distribution to shield consumers from high energy prices. As Europe seeks to reduce its reliance on Russian fossil fuels an extra push towards energy self-sufficiency and clean power may be triggered.

European Energy Commissioner Kadri Simson said the war has made it “painfully clear that we cannot afford to leave to any third country the power to destabilise our energy markets or influence our energy choices”.

In an effort to reduce global warming, Europe has committed to decreasing greenhouse gas emission by 55 per cent by 2030 and to reach net zero emissions by 2050. The EU currently remains reliant on oil and gas, and Russia provides more than 25 per cent of the EU’s crude oil, and nearly 40 per cent of its gas.

Rocketing oil prices, rising unemployment and loose monetary policy led to the last major stagflation period back in the 1960s, where the core consumer price index increased to a high of 13.5 per cent in 1980 and the Fed increased interest rates to nearly 20 per cent.

Having said this, the world is much less reliant on crude oil than it once was. Furthermore, governments and policymakers may use this opportunity to continue pushing businesses and consumers towards clean energy alternatives.

Noelle Micallef is a capital markets analyst at Curmi and Partners Ltd.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.


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