Over the past two months, the world has lost around 1 billion barrels of oil, and it will take time for energy markets to stabilise, even if supplies are restored. This was stated on 10 May by Amin Nasser, CEO of Saudi Aramco.

“Restoring supply routes is not the same as normalising a market that has been deprived of approximately one billion barrels of oil,” said the head of Saudi Arabia’s state-owned oil company, adding that years of underinvestment in the oil production sector have exacerbated the already considerable strain on global oil reserves.

It is estimated that underinvestment in the global oil industry amounted to $2–3 trillion due to a number of reasons, such as: the fall in oil prices in 2014–2016, shareholders withdrawing large dividends from oil companies instead of reinvesting profits, an increased focus on the environmental ‘agenda’. As a result, the global oil production sector lacks spare capacity to replace volumes lost due to political and military risks.

The current situation surrounding the Strait of Hormuz and chronic underinvestment in the oil industry over the past 10 years have triggered a restructuring of the global energy market. The Middle East is losing its status as a safe region for Western oil capital. Major Western oil companies are freezing new long-term projects in the Persian Gulf due to logistical and military risks, which is entirely logical from their perspective.

Local state-owned companies in the Middle East will continue to invest, and Asian players may attempt to fill the gap left by the shortage of foreign capital. China is likely prepared to take risks to ensure its own energy security, as well as to forge political and economic ties with countries in the Middle East. However, they will not be able to replace Western companies due to a lack of capital and less-than-state-of-the-art technology

It is estimated that by 2030, $4.5–5 trillion will need to be invested to meet global oil demand. The main flow of investment capital will shift to the Western Hemisphere and regions with lower geopolitical and military risks. The main beneficiaries will be US shale oil producers (in the immediate future – within a few months) and the US deepwater shelf (in the relatively near future – within a few quarters). Projects in Argentina, Brazil, Guyana, Namibia and Suriname will also become attractive to investors. However, implementation will take time, and the new production volumes will not offset the production from the Middle East, which has been lost for the long term.

It appears that a period of persistently high prices has begun due to the oil shortage and investment challenges. The global market has lost its cheap Middle Eastern ‘safety cushion’. New projects in South and North America and Africa have higher production costs, which automatically raises the break-even point for investment returns. And, consequently, increases the price of the raw material. In addition to this, oil prices will now remain at a high level due to the risk premium built into them for an even greater reduction in supplies from the Middle East, should the Bab el-Mandeb Strait be blocked as well as the Strait of Hormuz. Among other things, high oil prices support Russia’s ability to finance the war in Ukraine and worsen the state of the European economy, reducing the EU’s capacity to support Ukraine.

During the 2020–2021 coronavirus pandemic, the logistics crisis became a major driver of inflation, accounting for a significant portion of the overall rise in consumer prices. It all began with the sudden closure of ports, which created a physical shortage of goods. The cost of sea freight soared: the price of shipping a container rose from 2,500–3,000 to 15,000 dollars. Businesses operating on a ‘just-in-time’ model (a production and logistics management model where raw materials and components arrive at the factory exactly when they are needed, and in the required quantities, allowing for significant savings on stock and staff), found themselves unprepared for the disruption to supply chains and were forced to pass on the increased transport costs to the end consumer. The rise in fuel costs due to shortages will likewise be factored into the retail prices of goods and services.

The Global Supply Chain Stress Index has been rising rapidly since the start of the war in Iran (this index, developed by the Federal Reserve Bank of New York, is a key indicator of tension in international manufacturing and shipping markets).

It is heading towards a situation where a wave of inflation will sweep across the world. But with a certain delay, as transport and logistics costs – a large proportion of which is accounted for by fuel costs – are passed on to retail prices gradually. This nature of price transmission means that transport costs will continue to put pressure on prices and the economy even after de-escalation in the largest oil-producing region (it is not yet known when this will be achieved).

These issues fully apply to Ukraine as well, as a country that is almost entirely dependent on fuel imports for transport. The first wave of consequences was observed in March and April – the renegotiation of contracts between manufacturers and retail chains regarding prices. The second wave will be a rise in retail prices, which is expected in May–June (from July, consumer inflation should slow down thanks to the new harvest, but the overall price level will remain higher than it is now).

Given that the crisis surrounding Iran continues and there is no end in sight, we can expect consistently high global fuel prices. On a global economic scale, the only factor capable of breaking this trend remains a global recession and a fall in aggregate demand due to high fuel prices. This scenario, if it materialises, will have a negative impact on Ukraine’s economy, which is very closely integrated into the global economy and heavily dependent on its state. According to international trade theory, the Ukrainian economy is classified as a ‘small open’ economy, i.e. one that actively participates in international trade (exports and imports), but is too small to influence global prices.

On the other hand, a global economic recession, should it occur, could severely curtail Russia’s financial capacity to continue the war against Ukraine – due to a fall in demand for oil and a drop in oil prices, as revenues from the export of oil and petroleum products remain a crucial source of budget revenue for Russia.