Since the Russian president began his military campaign in Ukraine, there have been concerns about the potential impacts of this conflict on the global economy. This is due in part to Russia’s status as a major energy supplier and the potential for economic sanctions targeting Russia’s economy to be met with resistance by the Russian government, which could have global spillover effects and potentially impede efforts towards economic recovery from the COVID-19 pandemic. Statistically, Russia is the second largest oil exporter in the world, producing 4 billion barrels per day, and Ukraine and Russia together account for 28% of the global wheat supply. Additionally, Russia holds approximately 24% of the world’s confirmed natural gas reserves. These resources, including oil, gas, and wheat, are essential for food and energy supplies.

Efforts have been made on the political level to secure food and energy supplies from other countries, but establishing new supply lines requires significant upfront capital and operating costs. Therefore, seeking out new energy markets is generally discouraged unless absolutely necessary. The result of this situation is an increase in trade costs, the duration of which will depend on the length of the conflict and its resolution. This will likely lead to higher production costs for oil for smaller market participants, such as Malaysia, which will result in higher demand for alternative energy sources.

Oil has over 6,000 derivatives, which are used in a variety of industrial processes and even in the production of everyday items such as clothing and medical equipment. Furthermore, the cost of oil production is rising due to geological factors. This makes oil, unlike other commodities, a necessary resource as there are no suitable substitutes currently available due to the increasing difficulty of extracting oil. According to Hubbert’s theory, oil production will reach a threshold before beginning to decline due to geological reasons, but the rate of decline is expected to roughly match the rate of production. Some experts argue that economies will adapt to lower levels of available oil in the market, which would lead to a weaker international financial position for importing countries as they continue to import oil at higher prices, resulting in a decline in domestic income and discretionary spending. The impact on employment levels will depend on investment in the energy sector.

Oil is a necessary component of various modes of transportation, which will lead to an increase in shipping costs that will be passed on to consumers. In the past, events such as the 1973 oil crisis in the Middle East and the invasion of Iraq by the United States in 2003 have disrupted oil supplies and led to price fluctuations. In addition, economic sanctions imposed by the United States on oil-rich exporting countries like Iran, Venezuela, and Nigeria have suppressed the amount of oil available and limited access to these resources. These geopolitical tensions have been a significant contributor to price fluctuations and concerns about future supply disruptions.

In addition to political concerns, the combination of growing demand and fears about future supply disruptions have had a significant impact on oil prices. Although the Organization of the Petroleum Exporting Countries (OPEC) has slowly increased production, logistical issues such as a lack of shipping and storage capacity post-COVID have exacerbated the problem. The increasing urbanization and industrialization of countries like China and India have contributed to growing energy demand, while the expansion of renewable energy sources has led to competition for market share. These factors, along with the potential for future supply disruptions, have all contributed to volatility in the oil market.

*This is a part of a longer essay that was submitted for current issues in economics class at Universiti Putra Malaysia

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https://ourfiniteworld.com/2012/08/29/the-long-term-tie-between-energysupply- population-and-the-economy/