The Russian invasion of Ukraine, already a humanitarian and global security crisis, is deepening concerns about energy prices. Even before the invasion, gasoline prices in the United States had risen sharply since last February, driving inflation to a near 40-year high. Will the conflict drive prices even higher, and for how long? The answer: The effects are real but will likely be short-lived and/or regionalized, with the European market bearing the most significant impacts.
The assault fits a pattern. Russia has typically invaded neighboring states against a backdrop of high oil prices: Afghanistan (1979), Georgia (2008), and the annexation of Crimea (early 2014). But it is also a pattern that applies more generally to other petrostates, or countries for which net oil exports make up 10 percent or more of GDP: High oil prices embolden leaders of oil-rich countries to pursue more aggressive foreign policies and undertake more offensive military operations.
These high oil prices lower the anticipated costs or punishments for bad behavior and provide partial insurance against risky behavior. Does anyone doubt the European Union's response to Russia would be even more aggressive were it not for its dependence on Russian natural gas exports, or that US sanctions would target Russia's main exports if they were not energy-related? For smaller states, like Kuwait, their oil-exporter status gives importing countries much greater stakes in those small states' security and confers implicit security guarantees. (Sometimes those guarantees are explicit, as with the Cold War–era Eisenhower doctrine enabling the United States to come to the aid of countries requesting assistance against attacks.) Like other forms of insurance, these security guarantees can lead countries to more risky behavior than would be expected in their absence.
Petrostates have higher military defense expenditures, and these may appear (or in fact be) offensive and destabilizing to neighboring countries. High oil prices also have a psychological effect on petrostate leaders, particularly relating to subjective risk-reward calculations. When oil prices are in the doldrums, leaders may be cautious because they are worried about the state of their economies. When prices are high, they may feel more aggressive and confident about their prospects on the battlefield.
But does bellicose behavior by oil-rich countries drive up global prices? The answer may seem to be an obvious "yes." Futures contracts for Brent crude, the most widely traded oil benchmark, shot up from $96-$97 per barrel on February 23, the day before the invasion, to over $105 by midday on February 24 and up to $115 as of March 2, as the breadth of the Russian offensive came into stark relief. By historic standards, the price increase isn't all that remarkable. So far, Brent crude's highest point has been 18 percent above pre-invasion prices. By comparison, oil prices shot up by 60 percent in the month following Iraq's invasion of Kuwait in 1990. But these price increases could well be short-lived.
Markets often react skittishly in the immediate wake of a conflict outbreak involving major oil exporters, but these effects are usually not durable. Massimo Guidolin and Eliana La Ferrara analyzed the effects of conflict onset (both intra-state, as in the Syrian Civil War, and interstate, like Russia-Ukraine) on oil spot and futures prices. Using event history analysis, they found only weak evidence that oil prices respond to conflict initiation in petrostates, but the effects varied across conflicts, with some conflicts depressing oil prices (for example, the coalition invasion of Iraq in 1991) and others increasing them (the original Iraqi invasion of Kuwait in 1990). In either case, the estimated effects persisted only over a matter of weeks.
Addressing the same question with annual data, I have found no evidence of conflict onsets involving petrostates systematically driving up prices. This finding contrasts with the solid evidence that natural disasters in oil-producing countries and regions—like Hurricane Katrina's devastation of offshore platforms in the Gulf of Mexico and refineries on land—drive up global prices. In the main, the evidence does not support a straightforward relationship between petrostate conflict and higher prices, even if the causal arrow operates in reverse, from prices to conflict.
This evidence is at odds with conventional wisdom but consistent with some of the mechanisms outlined earlier. While armed conflicts may drive price changes over days or weeks, the strategic significance of oil prices and oil-exporting states encourages major powers—and increasingly, other oil-exporting states—to act in ways that stabilize both energy and asset markets. President Joseph R. Biden Jr. announced a 30-country coordinated release from countries' respective strategic oil reserves during the State of the Union address. In contrast, Saudi Arabia recently demurred from raising oil production to tamp down global oil and gas prices, in part because President Biden has resisted making a personal appeal to what he has called a "pariah" state. The Saudi tune may change if global stock markets continue to be hammered. Along with other major exporting countries like Kuwait and the United Arab Emirates, Saudi Arabia is sensitive to securities markets because of the billions of dollars they have invested therein via their sovereign wealth funds. Because of the relationship between high energy prices and slow economic growth, a high price environment is not an unalloyed blessing for energy exporters.
There are two important caveats. First, while oil markets are effectively global, natural gas markets are more regional and dependent on systems of pipelines and liquefied natural gas (LNG) shipments that make diversifying supply more difficult. Dutch gas futures and German energy costs rose sharply in the wake of Russia's invasion, a signal of their dependence on Russian exports and the strategic leverage those exports confer. Dutch TTF gas futures, a useful benchmark for European gas prices, is trading well above pre-invasions levels (currently €117 per megawatt hour), though these levels are inflated relative to pre-fall 2021 prices. But the price effects of the conflict so far have been muted when compared to the effect of the temporary reversal of flows via Russia's Yamal pipeline in December 2021; then, prices soared to near €180 per megawatt hour.
It remains unclear whether the sanctions imposed by the United States and the European Union will be successful in turning Russia into "a pariah," to use Biden's term. If they are successful, hobbling Russia's other sources of export revenue, access to foreign capital, and high-tech imports may encourage Russia to loosen its grip on Europe's natural gas supply, even if the sanctions are not directly effective in thwarting Russia's ambitions in Ukraine. In the near term, Europe will need Russian gas, and the waiver of the freeze on Russian central bank assets to allow for payments for natural gas is evidence of this reality. However, the approaching spring weather and decreased demand for heating fuel will soon diminish this need.
Knowing just where the Russia-Ukraine conflict will lead is anyone's guess. But there are good reasons to believe the effects for global energy markets will not be as grave as conventional wisdom would suggest.
1 . Their threshold for what constitutes a petrostate is different: less than 33 percent of export revenue.