What is happening now is very reminiscent of the events of 50 years ago. It is true that the embargo on Russian energy resources is being introduced by consumers providing military assistance to the government of Ukraine. By the way, one of the consequences of the oil crises of the 1970s was the introduction of large gas pipelines linking the Soviet Union with Western Europe, which were intended to reduce the latter’s dependence on Arab oil. At the same time, projects for the construction of LNG terminals in the Arctic were on the agenda to organise the supply of Soviet liquefied gas to the United States with the same goal - to increase the security of the energy supply through the diversification of suppliers. True, detente in Soviet-American relations ended before it really began, and already in the early 1980s, the Reagan administration fought fiercely against the construction of the Urengoy-Pomary-Uzhgorod gas pipeline, or as it was called in the American media and official documents, the Siberian Gas Pipeline to deliver large volumes of gas from Western Siberia to Germany, France, Italy and Austria. In general, history, as you know, tends to repeat itself.
There are also, however, striking differences. The fact is that energy prices began to rally long before the conflict in Donbass entered the hot phase and the bombing of Moscow with sanctions packages from Brussels and Washington. In the fourth quarter of 2020, Brent oil cost a little more than $44 per barrel, and during the last quarter of 2021 it was almost $80. The growth of quotations amounted to 80%. Accordingly, the price of a gallon of petrol in the US increased by 89% - from $1.25 to $2.36 (EIA data for the price of Regular FOB gasoline in New York Bay). Also, the spot price of gas at the American Henry Hub increased by 89% to $172 per thousand cubic meters ($4.77 per million British thermal units), although this index has not shown any correlation with the price of oil and gasoline for many years. All this pales in comparison to what happened to energy prices in Europe over the past year. The average price of gas at the spot (Dutch hub TTF) in the fourth quarter of 2021 was $1,160 per thousand cubic meters. That is 6 times or 607% more than in October-December 2020.
Imported thermal coal delivered to the ports of north-western Europe rose in price by 2.5 times or by 241% - from $66 to $160 per tonne. The price of electricity (spot one day ahead in base load), for example, in the UK jumped almost 4.5 times or 439% - from 50 to 222 pounds per MWh. On the face of this is not just inflation of energy resources, but hyperinflation. Moreover, the impact of the Ukrainian crisis on energy prices was very moderate. In the first quarter of 2022, prices for oil, gasoline and imported coal continued to rise in Europe. Brent crude has averaged over $100 (up 26% Q4 2021), U.S. gasoline is up 19% and coal in Europe is up 41% on the back of an embargo by the EU, though it has been delayed until August. However, gas did not rise in price in the first quarter neither in the US nor in Europe, and electricity in the UK even slightly fell in price (by 4%). At the same time, compared to the same period last year, the growth dynamics were preserved. In the United States, since April, gas price increases have picked up sharply on the back of slow production growth, depleted storage facilities, and strong demand from LNG plants, which produce mostly Europe-bound gas. As a result, in April, gas at HH in the US cost 2.5 times more than a year ago, and in May - 2.7 times more.
Given that US spot prices are directly linked to prices for power plants, industrial consumers, and commercial consumers (i.e., the entire market, except for individual buyers, which account for only 17% of the 780 billion cubic meters of total demand), a two- to three-fold increase in prices for gas have placed a heavy burden on the entire national economy. This is despite the fact that Washington has been a net exporter of natural gas for a couple of years now. The US has promised to provide for the whole world, including Europe, but it was unable to maintain a comfortable level for itself in a difficult moment. Of course, the situation there is better than in Europe, where gas prices were already 2-3 times higher and even jumped 5-6-fold. However, the EU market after Brexit is 90% dependent on imports, and for them such a rise in prices is another reason to promote the rejection of hydrocarbons “at any cost”.
As a result, in March inflation in the United States reached a 41-year high of 8.5%, in the UK it reached 7%, which has not been seen for 30 years, and in the European Union in April it was 7.5% on average (a year ago it was 1 .6%). Moreover, 5 countries out of 27 posted double-digit inflation; the absolute leader, Estonia, saw prices increase 19%.
The economies of Europe and the United States suffered from all of these woes before the aggravation of the situation in Ukraine. The introduction of a complete embargo on Russian energy resources is still a long way off, but difficulties with logistics, as well as the production of related products, such as mineral fertilizers, are already beginning to appear and will intensify for the foreseeable future, accelerating inflation, fuelling fears of energy shortages and provoking a slowdown in economic growth.