Andrei Liakhov writes: Heavily dependent on one supplier and inefficient, Ukraine will suffer the consequences of an oil price spike more than the rest of Europe.
Since the late 1980s, it has been clear to most experts that the only way for oil prices is up, up and up again. The reasons for this trend lie primarily in the combination of such diverse factors as decreasing investment into exploration, dropping numbers of oilmen worldwide, lack of modern offshore drilling rigs and lack of easy oil.
The majority of new finds either have very complicated geological characteristics, are located in difficult areas or require innovative extraction techniques like oil sands.
It’s a mystery why the sorry state of the international oil industry is usually disregarded in calculations of the growth of demand. The growth in demand from China cannot on its own account for the leap in the oil price as China re-exports much of this oil in the form of everything from plastic toys to motorcars.
The crisis has revealed the dangerous fragility of the global energy supply system. Fortunately, it stopped just short of Saudi Arabia, the place where a doomsday scenario could have begun.
A substantial share of the increasing Chinese energy-intensity simply reflects the geographic relocation of industrial activity, as the West cedes the manufacture of almost everything to cheap economies.
None of this was ever a surprise. What was a surprise was the current crisis in the Middle East, as angry populations attempt to unseat authoritarian leaders.
The crisis has revealed the dangerous fragility of the global energy supply system. Fortunately, it stopped just short of Saudi Arabia, the place where a doomsday scenario could have begun.
The controversial concept of Peak Oil – the time when maximum output is reached, after which it will enter terminal decline – appears to be drawing nigh.
Depletion of the world’s super-giant fields is fairly advanced, and, while new oil is being discovered, it is very inconveniently located, with extraction costs mandating an ever-higher break-even price. Currently, to extract one barrel of oil on average requires energy equal to that contained in a barrel of oil.
After dropping during the 2009 recession, oil prices are back at $110 per barrel levels or higher. There is a good bit of financial speculation in the oil price, with speculators driving the price up and down and creating volatility.
But the price is given added volatility by Western policy decisions, most notably the air strikes against Muammar Gadhafi’s regime in Libya. This conflict is heading toward stalemate and has an unpredictable outcome.
In addition, the West has lost credibility among the Gulf monarchs for having abandoned Egyptian leader Hosni Mubarak, as well as their perceived failure to block Iranian advances in the Gulf.
The inevitable result is that Ukraine will suffer the consequences of an oil price spike even more than the rest of Europe, which for a long time has been trying to limit its dependence on black gold.
A nightmare scenario for oil prices would materialize if the Sunni oil-states launch a desperate solo attack on Iran.
Were this to happen, and the missiles to fly, there would simply be no available source to compensate for the huge loss of oil output, threatening the global economy with a collapse into a new ice age.
What does this mean for Ukraine? First, it means higher prices for natural gas, the majority of which Ukraine imports from Russia. Since the 2009 gas agreement, Ukraine buys Russian imports at prices pegged to that of oil and gasoil.
That means that heating bills this winter will bite harder. Second, almost one-third of Ukrainian commercial cargo traffic is powered by various oil products. Any hike in the oil product prices will be passed on to end consumers, kicking inflation higher.
Third, despite more than 20 years of heated debates and hand combat in parliament, there has been no serious attempt to create a more energy-efficient economy, cutting reliance on hydrocarbon fuels.
The inevitable result is that Ukraine will suffer the consequences of an oil price spike even more than the rest of Europe, which for a long time has been trying to limit its dependence on black gold.
Andrei Liakhov is a partner at Integrites, a Kyiv-based law firm.
