By Kavyansh Yadav, Executive
The Oil and Gas Industry is a vital resource and a key indicator of economic growth. It has been a
necessity, contributing towards industrial development, and has a cause and effect relationship with
inflation as this commodity determines the prices of input, affecting production of raw materials and
consumer prices factor in transportation cost, including fuel prices. A study by the Federal Reserve
Bank of Dallas in September 2021 suggested that if crude oil prices rose to $100 per barrel for three
months before retreating, the spike would boost the annual inflation rate by 3% in the short term, with
the effect fading quickly as oil prices pulled back.
The oil and gas industry is highly sensitive to geo-political terms and conflicts due its critical role in
the economy. Large scale wars have greatly affected the industry in various ways, particularly in trade
and geopolitical relations. The trade of this industry is influenced by a lot of factors which involve the
geo-political policies and politics, availability of a trade channel and global supply demand.
THE DEMAND-SUPPLY and CONTRADICTORY TREND
The basic demand and supply of any commodity goes simple- if demand is higher than supply, the
prices will rise, and if supply is higher, the prices will fall.
In the case of demand, not only wars and conflicts, but general economic growth and imbalance plays a bigger role. The trends have shown that though the demand of global oil consumption is rising, current demand is slower than production.
Various oil suppliers have emerged in the market over the
years, other than OPAC. Not only this, the general awareness of the individual to save resources, and
technological advancements to make efficient use of resources have also affected the industry.
From the data observed from International Energy Agency, In both 2022 and 2023, global oil
consumption rose by more than 2 mb/d (million barrels per day) as economies continued their
recoveries from the Covid-19 shock and saw spikes in personal mobility, along with exceptional
releases of pent-up demand for travel and tourism. The future global demand is expected to slow
down, but despite that fact global oil demand is still forecast to be 3.2 mb/d higher in 2030 than in
2023 unless stronger policy measures are implemented or changes in behavior take hold. (1.) (2.)
The conflict in the Middle-East caused a significant and shocking trend in the prices of oil. Iran, being in conflict with Israel recently, contributes to the production of 4% of the world’s oil, putting it in the top ten producers globally. It also holds a significant influence over the Strait of Hormuz, a shipping route which around a fifth of the world’s oil passes through. During June 2024, forecasters predicted the prices to spike high, expected to cross $100 a barrel, but it turned out to be benign as the prices assumed normalcy quickly and again seem range-bound.
The reason for such a contradictory trend was that the world’s three largest consumers of oil had not
only advanced themselves strategically, but also due to forging alliances with non-OPEC oil
producers. Despite the supply diversification, advances in Technology have been a big assurer of US
energy security. China has begun its strategic reserves and is reportedly trying to upgrade and better
utilize its refining capacities. India, meanwhile, has been benefiting through the supply of discounted
oil from Russia. (3.)
From the above case it was evident that the current supply and reserves of oil was enough to not
create much of a global imbalance, and the fact that there are competitors even in such a market,
providing alternatives. Countries all over the world are moving towards a more efficient way of utilising
their limited resources, and taking significant steps towards advancement of their technology and
alternatives.
THE SUPPLY CHANNELS AND GEO-POLITICS
Supply channels through which the oil and gas is supplied, play a significant role in manipulating the
prices, and disrupting the economy of a country. If the supply has been blocked, the prices of the
commodity will rise, which will eventually result in imbalance in an economy. Countries may have to take measures and make policies to reduce their consumption, and look for long term solutions which often leads to choosing an alternative to the commodity.
They also help in compromising the geo-politics of the world, along with other factors, such as
measures and steps taken which could result in bitter relations with one country while coming to
terms with another global power.
Wars and conflicts around Iraq could not only compromise the supply of oil, but can also stop one of
the most important trade channels. This is not only in theory, Iran is known to seize and stop ships
going through the Strait of Hormuz, one such incident being in July 2019, when Iranian forces
descended on a Swedish-owned vessel sailing under the British flag. More recently, Iran seized a
commercial ship with links to Israel on Saturday 13 April, shortly before launching its drone and
missile strike.
The recent Ukraine-Russia war can serve as the prime example of this disbalance and its implication
being primarily on Europe. Russia, being the 3rd largest exporter of crude oil, contributing 12% to the global crude oil production, was responsible for supply of almost 20% of the continent’s oil and 30% of its gas. Several countries in Europe, including Austria, Finland, Poland, Slovakia and Hungary are dependent on Russia for 50-100% of their oil and gas imports.
The European Union took measures to cope with the problem, by making strategic plans to cut gas
usage by 15%. Germany, being most reliant on Russian oil supply, also took measures to cut its
energy consumption by 2%. (4.)
On december 2022, (5.), the G7 countries decided to impose a price cap on Russian oil, with the
intention to reduce the revenues. Russia had been reducing the supply through Nord stream 1 for a
number of months. Russia’s attempt to cut-off supply to Europe were assumed to coerce Europeans
into acquiescence, or at least to paralyze them politically and thus prevent them from supporting
Kyiv. (6.)
Putin’s policy also became an influential topic for discussion when it was announced that the trade of
oil from Russia is to be paid in Rubles instead of Dollars, such a condition being implied to countries
considered “hostile” to Moscow. (7.)
As discussed above, the shortage of supply of such a necessary commodity resulted in shifting to
various alternatives which included changing their suppliers and using their reserves. The industry in
Russia suffered a greater loss as their revenue plummeted, though they did manage to hurt the
economy of Europe significantly. Despite the efforts, the demand for oil rises, and supply being cut
short, it resulted in record high prices in Europe, eventually coming back to normal.
From the data presented by the European Central Bank, (8.), greater geopolitical uncertainty acts,oil
demand and oil prices it has been observed that taking long-term, the effect of geo-political tensions
across borders and channels can have a negative impact on overall demand and prices of oil. The
reason being, that geopolitical uncertainties raises doubt on overall economic outlook which
negatively affects consumption, investment and international trade. The market and consumers will
eventually adapt to current supply.
In conclusion, it can be stated that the oil and gas industry plays a central role in overall functioning of the global economy, determines the political relations between two countries and serves as the lifeline of industrial development. Being such a vital resources, it can also be concluded that the consumers have developed strategies to cope with the scarcity of this resource, and though prices may jump, it is only for short-term as the countries have the potential to quickly cope with such a change, and free market ultimately plays a role in normalizing itself.
SOURCESInternational Energy Agency (IEA)-
https://www.iea.org/news/slowing-demand-growth-and-surging-supply-put-global-oil-markets-on-course-for-major-surplusthis-decade
https://www.iea.org/commentaries/oil-demand-growing-at-a-slower-pace-as-post-covid-rebound-runs-its-course
Livemint
//en.wikipedia.org/wiki/2022_Russian_crude_oil_price_cap_sanctions
BBC newshttps://www.bbc.com/news/world-europe-60131520
Deutsche Welle(DW)-
https://www.dw.com/en/putins-gas-for-rubles-plan-set-to-worsen-eu-energy-crunch/a-61250164
Eureopean Central Bank
https://www.google.com/url?sa=t&source=web&rct=j&opi=89978449&url=https://www.ecb.europa.eu/press/
economic-bulletin/focus/2024/html/
ecb.ebbox202402_01~b3d857ae05.en.html&ved=2ahUKEwju6tCj2q2HAxWKTGcHHV2IBw8QFnoECBYQAQ&u
sg=AOvVaw3HAwgKDUGBGUGD8POxm9gM
Editorial Board 