OPINIONS – 25.03.22 17:42

Roudi Baroudi

Τι πρέπει να γίνει για να υπάρχει απεξάρτηση από το ρωσικό αέριο και να κινούνται τα αγαθά για την ειρήνη, όχι για τον πόλεμο

Οι επιφυλάξεις της Ευρώπης να βάλει στο στόχαστρο τη ρωσική ενεργειακή βιομηχανία για να τιμωρήσει τη Μόσχα για την εισβολή της στην Ουκρανία έχει αποκαλύψει ότι οι ενεργειακές προμήθειες της ηπείρου δεν είναι επαρκείς, με τις καλύτερες λύσεις να απαιτούν βαθύτερη κατανόηση του πώς η ευρωπαϊκή κατάσταση έφτασε στο σημείο που είναι σήμερα.

Η απλή εξήγηση είναι ότι η Γερμανία και πολλές άλλες ευρωπαϊκές χώρες έχουν γίνει υπερβολικά εξαρτημένες από τις εισαγωγές ρωσικού φυσικού αερίου. Αλλά αυτό είναι μόνο εν μέρει αλήθεια, καθώς πολλοί άλλοι παράγοντες τονίζουν την αδυναμία της Ευρώπης, άλλοι το αποδίδουν σε ατυχή συγκυρία, άλλοι το ερμηνεύουν ως αποτυχία στο επίπεδο λήψης στρατηγικών αποφάσεων.

Πρώτον, πολλές κυβερνήσεις αποφάσισαν να κλείσουν τους πυρηνικούς σταθμούς και τους σταθμούς ηλεκτροπαραγωγής με άνθρακα τα τελευταία χρόνια, γεγονός που απλώς αύξησε την ανάγκη της Ευρώπης και συνεπώς την εξάρτησή της από το ρωσικό αέριο. Αυτό δεν σημαίνει ότι δεν υπήρχαν επιτακτικοί λόγοι για αυτές τις αποφάσεις, και η σύμπτωση αυτής της μεταπυρηνικής περιόδου με την κρίση Ρωσίας-Ουκρανίας είναι τουλάχιστον εν μέρει κακή τύχη.

Ωστόσο δεν μπορεί να αμφισβητηθεί το γεγονός ότι η αδράνεια ή η ανικανότητα σε μεγάλες παραγωγές έχει αφήσει την Ευρώπη με λίγες πρακτικές και βιώσιμες εναλλακτικές λύσεις.

Το πραγματικό πρόβλημα, ωστόσο, δεν ήταν οι πυρηνικές διακοπές λειτουργίας των ίδιων των τοπικών μονάδων παραγωγής, αλλά μάλλον μια αποτυχία επαρκούς προετοιμασίας για τις συνέπειες προσθέτοντας άλλες εναλλακτικές όπως τις ανανεώσιμες πηγές ενέργειας.

Επίσης στη Γερμανία, και εν μέρει παράλληλα με τις διαδικασίες αποπυρηνικοποίησης, δύο νέοι τερματικοί σταθμοί για την παραλαβή υγροποιημένου φυσικού αερίου (LNG) έχουν καθυστερήσει για περισσότερο από μια δεκαετία.

Αυτό σημαίνει ότι ακόμη κι αν η Ευρώπη μπορούσε να εξασφαλίσει αρκετό LNG για να αντικαταστήσει το φυσικό αέριο που λαμβάνει από τη Ρωσία, δεν έχει επαρκή ικανότητα επαναεριοποίησης για να το χρησιμοποιήσει πλήρως.

Ομοίως, ο προτεινόμενος αγωγός Nabucco -ο οποίος θα μετέφερε αέριο από το Αζερμπαϊτζάν, την Αίγυπτο, το Ιράκ ή και το Τουρκμενιστάν από την Τουρκία στην Αυστρία- σημείωσε επίσης επανειλημμένες καθυστερήσεις και τελικά ακυρώθηκε το 2013, επιβάλλοντας περαιτέρω τη σημασία του ρωσικού φυσικού αερίου και των ρωσικών αγωγών.

Παρά το γεγονός ότι η Ευρώπη έχασε αυτές και άλλες ευκαιρίες να γίνει πιο ευέλικτη και πιο ανθεκτική διαφοροποιώντας τις πηγές, τα μέσα και τις οδούς εφοδιασμού της, έχει ακόμη χρόνο να βελτιώσει ουσιαστικά τη θέση της, ιδίως μεσοπρόθεσμα και μακροπρόθεσμα.

Μια πολλά υποσχόμενη επιλογή είναι μια διασύνδεση φυσικού αερίου που θα επεκτείνει ριζικά τη χωρητικότητα του αγωγού μεταξύ της Ισπανίας, με υποθαλάσσιους αγωγούς προς την Αλγερία και το Μαρόκο και μια σημαντική αχρησιμοποίητη ικανότητα επαναεριοποίησης, και της Γαλλίας, από όπου οι εν λόγω προμήθειες θα μπορούσαν στη συνέχεια να διανεμηθούν σε άλλα σημεία της Ευρώπης.

Πολιτικές και άλλες ανησυχίες έχουν επιβραδύνει και αυτή την πρόταση, επομένως μπορούμε μόνο να ελπίζουμε ότι το επεισόδιο της Ουκρανίας θα βοηθήσει να ανανεωθεί η εστίαση στη Μαδρίτη και το Παρίσι.

Υπάρχουν και άλλα βήματα που θα μπορούσε να κάνει η Ευρώπη, μερικά από αυτά αρκετά απλά και απαιτούν λιγότερα από τη διακρατική συμφωνία και συνεργασία που μπορεί να πάρουν τόσο πολύ χρόνο για να επιτευχθούν και να ενεργοποιηθούν.

Το ένα είναι να ενισχύσουμε την ικανότητα της ηπείρου να αντέχει τις διακοπές παράδοσης αυξάνοντας την ικανότητα αποθήκευσης, είτε για συμβατικό αέριο σε υπόγεια σπήλαια αλατιού είτε για την υγροποιημένη έκδοση σε νέες ή διευρυμένες αποθήκες LNG. Ένα άλλο είναι να καθυστερήσουν οι Γερμανοί, οι Βέλγοι και άλλοι το κλείσιμο των πυρηνικών σταθμών που επί του παρόντος προγραμματίζονται για παροπλισμό.

Ένα τρίτο είναι να επεκτείνουν οι Ολλανδοί τα υπάρχοντα λιμάνια λήψης LNG και ένα τέταρτο ξεκίνησε τις τελευταίες ημέρες, καθώς οι Γερμανοί άρχισαν να εργάζονται για τις δικές τους εγκαταστάσεις παραλαβής. Ένα πέμπτο είναι να εργαστεί άμεσα στο κοίτασμα φυσικού αερίου East Med Leviathan για σύνδεση μέσω αγωγού με την Τουρκία και μετά με την Ευρώπη.

Η κατάσταση μπορεί επίσης να βελτιωθεί από χώρες εκτός Ευρώπης. Οι Ηνωμένες Πολιτείες, για παράδειγμα, έχουν διπλασιάσει τις εξαγωγές LNG στην Ευρώπη, και το Κατάρ -το οποίο τήρησε κάθε μία από τις δεσμεύσεις του για παράδοση παρά τον παράνομο αποκλεισμό δυόμισι ετών που του επέβαλαν ορισμένοι από τους γείτονές του- θα πρέπει να είναι σε θέση να αυξήσει και τις αποστολές του, κάτι που θα αποκαθιστούσε την εμπιστοσύνη στις αγορές εφοδιασμού.

Εκτός από το φυσικό αέριο που διοχετεύεται με αγωγούς, η Ισπανία λαμβάνει επίσης ηλεκτρική ενέργεια που παράγεται από ηλιακά πάρκα στη Βόρεια Αφρική και τα περιθώρια για παρόμοια κοινά δίκτυα στην ευρωμεσογειακή περιοχή είναι τεράστια.

Τελευταίο, αλλά σίγουρα εξίσου σημαντικό, η Ευρώπη μπορεί να εξυπηρετήσει καλύτερα τα δικά της συμφέροντα -με όλη τη σημασία της λέξης- εγκρίνοντας τη χρηματοδοτική της υποστήριξη σε μελλοντικά έργα πετρελαίου και φυσικού αερίου για τα επόμενα χρόνια και λαμβάνοντας ακόμη πιο σοβαρά τις ανανεώσιμες πηγές ενέργειας.

Οι ευρωμεσογειακές χώρες από μόνες τους έχουν αρκετό υπεράκτιο δυναμικό αιολικής ενέργειας για να αντικαταστήσουν ολόκληρη την παγκόσμια πυρηνική βιομηχανία, και άλλες τεχνολογίες καλούν επίσης, όπως ηλιακή, κυματική, παλιρροιακή και υποθαλάσσια γεωθερμία.

Όλα αυτά για να υπάρχει απεξάρτηση από το ρωσικό αέριο και να κινούνται τα αγαθά για την ειρήνη, όχι για τον πόλεμο.

BY ROUDI BAROUDI, OPINION CONTRIBUTOR — 03/25/22 02:30 PM EDT
THE VIEWS EXPRESSED BY CONTRIBUTORS ARE THEIR OWN AND NOT THE VIEW OF THE HILL

Europe’s hesitance over targeting Russia’s energy industry to punish Moscow for its invasion of Ukraine has exposed the precariousness of the continent’s energy supplies, with best solutions demanding a deeper understanding as to how the European situation got to where it is today.

The simple explanation is that Germany and several other European countries have become over-reliant on imports of Russian natural gas. But this is only partly true; numerous other factors accentuate Europe’s vulnerability, and while some amount to unfortunate timing, others stem from significant failings at the strategic decision-making level.

For one thing, several governments have decided to close their nuclear and coal power plants in recent years, which has only increased Europe’s need for — and therefore dependence on — Russian gas. This is not to say that there were no compelling reasons for these decisions, and the coincidence of this post-nuclear period with the Russia-Ukraine crisis is at least partly bad luck, yet there is no denying the fact that the idling of so much output capacity has left Europe with few practical and viable alternatives. The real problem, though, was not the nuclear shutdowns phasing out local generating units themselves; rather, it was a failure to adequately prepare for the consequences by adding enough new capacity, especially renewables.

Also in Germany, and partly alongside the denuclearization process, two new terminals for receiving seaborne shipments of liquefied natural gas (LNG) have been delayed for more than a decade. This means that even if Europe were able to secure enough LNG to replace the piped gas it gets from Russia, it lacks sufficient regasification capacity to make full use of it.

Similarly, the proposed Nabucco pipeline — which would have carried Azerbaijani, Egyptian, Iraqi, and/or Turkmen gas from Turkey to Austria — was also subjected to repeated delays and eventual cancellation in 2013, further entrenching the importance of Russian gas and Russian pipelines.

Despite having missed these and other opportunities to make itself more flexible and more resilient by diversifying its sources, means, and routes of supply, Europe still has time to substantially improve its position, especially in the medium and long terms.

One promising option is a gas interconnector which would radically expand the pipeline capacity between Spain, with both undersea pipelines to Algeria and Morocco and a considerable unused regasification capacity, and France, from where the supplies in question could then be distributed to other points in Europe. Political and other concerns have slowed this proposal as well, so we can only hope that the crisis in Ukraine will help renew the focus in Madrid and Paris.

There are other steps Europe could take as well, some of them quite straightforward and requiring less of the cross-border agreement and cooperation that can take so long to reach and activate. One is to bolster the continent’s ability to withstand delivery interruptions by increasing its storage capacity, whether for conventional gas in underground salt caverns or for the liquefied version in new or expanded LNG depots. Another is for the Germans, Belgians, and others to delay the closure of nuclear plants currently slated for decommissioning. A third is for the Dutch to expand their existing LNG receiving ports, and a fourth has got under way in the last few days as the Germans have started work on their own receiving facilities. A fifth is to work immediately on the East Med Leviathan gas field to connect via pipeline to Turkey and onward to Europe.

The situation can also be ameliorated from the outside. The United States, for example, has doubled its LNG exports to Europe, and Qatar — which met every single one of its delivery commitments despite the illegal two-and-half-year blockade imposed on it by some of its neighbors — should be able to increase its shipments, too, something that would restore confidence in supply markets. In addition to pipelined gas, Spain also receives electricity generated by solar farms in North Africa, and the scope for similar shared grids across the Euro-Mediterranean region is enormous.

Last, but certainly not least, Europe can best serve its own interests — in every sense of the word — by approving its financial support on future oil and gas projects for the next few years and getting even more serious about renewables. The Euro-Med countries alone have enough offshore wind power potential to replace the entire global nuclear industry, and other technologies beckon as well — including solar, wave, tidal, and undersea geothermal.

All this to become independent of Russian gas and to move for peace, not war.

Roudi Baroudi is a senior fellow at the Transatlantic Leadership Network and the author of “Maritime Disputes in the Mediterranean: The Way Forward” a book distributed by the Brookings Institution Press. With more than 40 years of experience in fields including oil and gas, electricity, infrastructure and public policy, he currently serves as CEO of Energy and Environment Holding, an independent consultancy based in Doha, Qatar.

Oil surged on Friday, ending the week at multi-year highs as Russia’s invasion of Ukraine intensified and oil buyers avoided barrels from Russia. Brent futures rose $7.65, or 6.9%, to settle at $118.11 a barrel, while U.S. West Texas Intermediate crude (WTI) rose $8.01, or 7.4%, to end at $115.68. Crude prices posted their largest weekly gains since the middle of 2020, with the Brent benchmark up 21% and U.S. crude gaining 26%. Oil surged throughout last week as the United States and allies heaped sanctions on Russia that, while not aimed at Russian oil and gas sales, nonetheless squeezed its industry, and threatens a growing supply crunch in coming months. Russia exports 4 million to 5 million barrels of oil daily, making it the second-largest crude exporter in the world after Saudi Arabia. Meanwhile, the Biden administration, under pressure from lawmakers, said it is considering options for cutting U.S. imports of Russian oil even as it tries to minimize the impact on global supplies and on consumers. Britain will look to target Russia’s energy sector in future rounds of sanctions, its foreign minister said Friday. The government has resisted this move so far, due to concerns that it will push up energy bills.
Asian LNG prices surge as buyers shun Russian gas
Asian spot liquefied natural gas prices rose last week, buoyed by concerns over Russian supply to Europe as buyers shun Russian gas and LNG in response to its invasion of Ukraine. The average LNG price for April delivery into north-east Asia was estimated at $40.5 per metric million British thermal units (mmBtu), up $3, or 8% from the previous week, industry sources said. Although the market remains extremely strong and extremely volatile, Asian buyers may be unwilling to replicate the price surge in Europe beyond a notional $50 per mmBtu, according to analysts, and may adopt a wait-and-see approach or switch to cheaper alternative fuels such as coal. In Europe, gas prices soared on Friday, with some contracts hitting all-time highs, as market participants continued to fear disruptions to Russian gas supplies to Europe in light of the war in Ukraine. The Dutch front-month contract rose by $17.65 per mmBtu on Friday, as the volatile and uncertain geopolitical landscape continues to drive prices. Meanwhile, an export ban by the Ukrainian government of gas held in the country, including stored gas usually held by Western Europe operators, was not impacting transit flows of Russian gas.
— By the Al-Attiyah Foundation

Feb 25, 2022JASON FURMAN

Russia’s invasion of Ukraine has been rapid and dramatic, but the global economic consequences will be much slower to materialize and less spectacular. Yet, other than Ukraine, Russia will likely be the biggest long-term economic loser from the conflict.

CAMBRIDGE – Russia’s invasion of Ukraine has been rapid and dramatic, but the economic consequences will be much slower to materialize and less spectacular. The war itself is enormously tragic, first and foremost for the Ukrainian people, but also for the Russian people and the global order more generally. When something like this happens, we expect it to be like a morality play in which all the bad consequences play out equally dramatically in every dimension, including the economy. But the economy does not work that way.

True, financial markets reacted swiftly to news of Russia’s invasion. The MSCI All Country World Index, a leading global equity gauge, fell to its lowest level in almost a year. The price of oil rose above $100 a barrel, while European natural gas prices initially surged by almost 70%.

These energy-price increases will negatively affect the global economy. Europe is especially vulnerable, because it did little in recent years to reduce its dependence on Russian gas, and in some cases – notably, Germany, which abandoned nuclear power – even exacerbated it.

Oil-importing countries will experience a headwind from higher prices. The United States is more hedged: Because its oil production is equal to its oil consumption, more expensive oil is roughly neutral for GDP. But higher oil prices will hurt US consumers while helping a more limited segment of businesses and workers tied to the oil and gas industry. The price surge will also add to inflation, which is already at its highest levels in a generation in the US, Europe, and other advanced economies.

But some perspective on these immediate consequences is in order. At $100 a barrel, oil is about one-quarter below its inflation-adjusted price during 2011 to 2014. Moreover, prices for oil futures are lower than spot prices, suggesting that the market expects this increase to be temporary. Central banks may therefore largely look through events in Ukraine, neither holding off on tightening nor speeding it up in response to higher headline inflation. And global stock markets are still up over the last year.

Similarly, although the Russian stock market has fallen significantly since the start of the invasion, Western sanctions are unlikely to have immediate dramatic effects. Sanctions rarely do; they are simply not the economic equivalent of the bombs that Russia is currently dropping on Ukraine.

Moreover, Russia is better prepared than most countries to weather sanctions. The country has been running an enormous current-account surplus and has accumulated record foreign-exchange reserves of $630 billion – sufficient to cover nearly two years of imports. And while Russia is dependent on revenue from Europe, Europeans are dependent on Russia’s oil and gas – which may be even harder to replace in the short run.

But, in the longer term, Russia will likely be the biggest economic loser from the conflict (after Ukraine, whose losses will go well beyond what can be measured in the national accounts). Russia’s economy, and the well-being of its population, have been stagnant since the Kremlin’s 2014 annexation of Crimea. The fallout from its current, large-scale invasion will almost certainly be more severe over time. Sanctions will increasingly take a toll, and Russia’s growing isolation, as well as heightened investor uncertainty, will weaken trade and other economic links. In addition, Europe can be expected to reduce its fossil-fuel dependence on Russia.

The longer-term economic consequences for the rest of the world will be far less severe than they are for Russia, but they will still be a persistent challenge for policymakers. There is a risk, albeit a relatively unlikely one, that higher short-run inflation will become embedded in increasingly unanchored inflation expectations, and thus persist. If that happens, central banks’ already difficult job will become even more complicated.

In addition, defense budgets are likely to rise in Europe, the US, and some other countries to reflect the increasingly dangerous global situation. This will not reduce GDP growth, but it will reduce people’s well-being, because resources dedicated to defense are resources that cannot go toward consumption or investment in education, health care, or infrastructure.

The medium- and long-term consequences for the global economy of Russia’s invasion of Ukraine will depend on choices. By invading, Russia has already made one terrible choice. The US, the European Union, and other governments have made initial choices on sanctions, but it remains to be seen how Russia will react to them or whether further penalties will be imposed. To the extent that sanctions and counter-responses escalate, the costs will be larger – first and foremost for Russia, but also to some degree for the rest of the global economy.

Global economic relations are positive-sum, and Russia’s growing isolation will remove a small positive. More broadly, uncertainty is never good for the economy.

But, as the world continues to respond to the Russian invasion, concerns about GDP seem minor by comparison. Far more important is a world where people and countries feel secure. And that is something worth paying for – even more than the world’s leaders have paid so far.

By John Kemp

LONDON, Feb 25 (Reuters) – Prominent business leaders in the U.S. shale industry have been proselytising about their newfound commitment to restricting output growth to protect prices and profit margins.

But the rate of new drilling and production is climbing in response to rising prices ― albeit more slowly than during the frenzied growth of the first (2009–2014) and second (2016–2019) shale booms.

Nearly 80 weeks after hitting a cyclical low, the number of rigs drilling for oil has risen by 348 (an average of 4.4 per week), according to data from oilfield services company Baker Hughes.

The rise compares with increases of 433 (5.5 per week) and 584 (7.4 per week) at the same point after the last two cyclical lows in 2016 and 2009 respectively.

The number of rigs is rising at roughly similar rates in the Permian Basin (2.4 per week) and the other oil-rich shale plays (2.0 per week).

As a result, onshore production from the Lower 48 states rose in six of the seven months between May 2021 and November 2021, the most recent month for which production statistics are available.

Onshore production was rising at an annual rate of roughly 630,000 barrels per day (bpd) at the end of 2021, according to the U.S. Energy Information Administration.

The agency predicts a similar increase of 630,000 bpd by the end of 2022 and a slightly slower one of 470,000 bpd by the end of 2023 (“Short-term energy outlook”, EIA, Feb. 8).

Output is increasing much more slowly, only a quarter to a third as fast, as at height of the last boom in 2018, when onshore production was increasing by as much as 1.8 million bpd over twelve months.

In that sense, shale industry leaders are being true to their word, increasing the number of new wells and production more slowly than before to protect prices and profit margins and return capital to shareholders.

But the industry’s commitment to limiting investment is being tested as prices continue rising to levels that are well above the long-term average after adjusting for inflation.

Faster production increases look likely as a result of the continued escalation in oil prices since the start of the year.

DELAYED RESPONSE

Shale drilling has become much more efficient since horizontal drilling and hydraulic fracturing techniques began to be widely applied to oil-rich plays at the start of the last decade.

In the short run, however, drilling exhibits diminishing marginal returns during an upswing; additional rigs add smaller increments to output as they are deployed to less promising sites with less experienced crews using older equipment.

Current rig counts cannot usefully be compared with those five let alone ten years ago, but short-term changes in the rig count can provide a useful directional indicator for output changes over the next 12 months.

Changes in oil futures prices generally filter through into changes in drilling activity with a lag of just under 20 weeks.

The explanation is that it takes four-to-five months for producers to see if price changes will be sustained before deciding to alter the drilling programme, contract with drilling firms, wait for rigs to arrive on site, set up and begin boring.

Current drilling rates therefore reflect prices in September–October 2021, when front-month futures were trading around $70–80 per barrel.

On average, it will take another six months for wells being drilled at present to be fractured, completed, hooked up to gathering systems and enter commercial production, which should keep output rising through at least August.

Since September–October, however, prices have risen by another $10–15 per barrel which will ensure the number of rigs keeps rising throughout the second quarter, and production climbs faster through the end of the year.

The rapid escalation in spot prices and severe backwardation in futures is signalling the urgent need for more crude to meet strong consumption growth as the economy rebounds after the pandemic-driven recession.

U.S. oil producers are starting to respond by increasing their drilling programmes in the core shale plays of Texas and more marginal ones elsewhere, which should improve oil availability later this year and especially in 2023.

Several key OPEC+ members see no need to accelerate output increases even as oil heads toward US$100 a barrel amid worsening tension over Ukraine.

Iraq and Nigeria said the group’s strategy of gradually raising production is enough to balance the market and the group has no need to be more aggressive.

Many delegates echoed that view privately on Tuesday, saying it wouldn’t make a difference if crude did hit triple digits.

The 23-nation alliance, led by Saudi Arabia and Russia, next meets on March 2. It is factoring in growth in output from non-OPEC+ members such as Brazil and Canada and doesn’t want to see any increase in commercially-stored oil around the world, according to Iraq’s Energy Minister Ihsan Abdul Jabbar.

“The market will have more and more oil so we think there’s no need” to diverge from today’s strategy, he said in an interview in Qatar, where he’s attending a natural gas conference. “We will not create any growth to the commercial storage. We will secure all the demand by making the required supply.”

KEEP STEADY

Nigeria’s energy minister, Timipre Sylva, backed Jabbar’s comments.

“We won’t do anything extraordinary at this time because we are expecting at lot of production” from outside of OPEC+, Sylva told reporters at the same event. There’s “no need at all to bring on more barrels than the current plan.”

Several of OPEC+’s biggest producers want to continue to add 400,000 barrels a day of crude to the market each month, Bloomberg reported on Monday.

Iraq’s Jabbar said the Organization of Petroleum Exporting Countries and its partners will make their decision for April at the March meeting, after reviewing fresh data on supply and demand.

Some major oil importers have called on OPEC+ to pump faster and put pressure on the likes of Saudi Arabia to use up some of their spare capacity.

Read more: OPEC+ Must Fix Its Million-Barrel Supply Gap, IEA Says

Jabbar said it would be “unfair” for any OPEC+ state to raise output beyond its quota, despite many members struggling to reach theirs. Last week, the International Agency Energy Agency, which advises rich countries, said OPEC+ was pumping almost 1 million barrels a day below its target.

“We have come from the recovery from COVID,” the Iraqi minister said. “It is not fair that you will give the increase just for some countries.”

Iraq undershot its output target last month because of bad weather at ports, Jabbar said. The country should meet its quota for February of around 4.3 million barrels a day, he said.

NEW YORK, Feb 20 (Reuters) – A U.S. stock market, already on edge from a hawkish Federal Reserve and a conflict between Russia and Ukraine, now has another worry: higher oil prices.

U.S. crude prices stand at around $91 a barrel after surging some 40% since Dec. 1 and earlier this week touched their highest level since 2014. Prices for Brent crude , the global benchmark, have also soared and are near 7-year highs.

Rapidly rising oil prices can be a troubling development for markets, as they cloud the economic outlook by increasing costs for businesses and consumers. Higher crude also threatens to accelerate already-surging inflation, compounding worries that the Fed will need to aggressively tighten monetary policy to tamp down consumer prices.

“The stock market would really run into trouble if we went north of $125 per barrel and stayed there for a while because that would overheat high levels of inflation,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “That means that the Fed would have to be a lot more aggressive and that certainly would not be a pleasant scenario for the stock market.”

Rising tensions between Russia – one of the world’s largest oil producers – and Ukraine recently helped drive the rally in oil, which had been supported by a recovery in demand from the coronavirus pandemic.

Capital Economics analysts said earlier this week that crude oil and natural gas prices would surge if the conflict in Ukraine escalated “even if they fall back relatively quickly as the dust settles.”

Elevated oil prices contributed to the rise in U.S. inflation, which grew at its fastest pace in nearly four decades last month: While overall consumer prices rose 7.5% year-over-year in January, the index’s energy component rose by 27%.

Each “sustained” $10 increase in the price of oil per barrel adds about 0.3 percentage points to the overall consumer price index, on a year-over-year basis, according to analysts at Oxford Economics.

“The largest impact of higher oil prices is on consumer price inflation and it adds further to the pressure for the Fed to be more aggressive,” Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said in emailed comments to Reuters.

The benchmark S&P 500 (.SPX) is down over 8% this year while the yield on the benchmark 10-year Treasury note has risen by 40 basis points to over 1.9%. Investors are pricing the Fed funds rate to rise to above 1.50% by the end of 2022, from near zero now, according to Refinitiv’s Fedwatch tool.

CONSUMER SPENDING IMPACT

Rising crude is already raising costs for businesses and drivers. The national U.S. average for gasoline recently stood at $3.48 a gallon, automobile group AAA said earlier this week, up 18 cents from a month earlier and 98 cents from a year ago.

As gasoline prices rise, investors are monitoring trends for consumers, whose spending accounts for over two-thirds of U.S. economic activity. Data on Wednesday showed U.S. retail sales increased by the most in 10 months in January, but last week’s consumer sentiment reading came in at its lowest level in more than a decade in early February. read more

“The risk is that if gas prices at the pump start going up that means less discretionary spending for consumers at a time when a lot of their fiscal benefits from the last couple years are fading,” said Michael Arone, chief investment strategist at State Street Global Advisors.

Investors are gauging the effect of higher oil on companies’ earnings. Typically, rising oil prices are estimated to lift overall S&P 500 earnings by about $1 per share for every $5 increase in the price of crude, according to David Bianco, Americas chief investment officer at DWS Group, with benefits to energy firms outweighing the drag on earnings of airlines and other companies potentially hurt by higher crude costs. That amounts to about 0.4% of total S&P 500 earnings expected for 2022.

The S&P 500 energy sector (.SPNY) is up 22% so far in 2022 while fund managers in the latest BofA Global Research survey reported their highest allocation to energy stocks since March 2012.

But with oil prices already near seven-year highs, and energy stocks comprising a far lower share of the market than a decade ago, those slim bottom-line benefits may be overshadowed by inflation worries if crude keeps charging higher, some investors said.

“Higher oil prices, without a recession, raise S&P profits,” Bianco said. “But not as much as it used to and you definitely don’t want this happening when the Fed is fighting inflation.”

Saudi Arabia’s sovereign wealth fund has been transforming almost as quickly as the country itself. In 2015, the Public Investment Fund, or PIF as it’s widely known, was a sleepy holding company for government investments that hardly anyone outside the kingdom had heard of. Now it’s closing in on $1 trillion in assets as it snaps up everything from soccer clubs to electric carmakers and bankrolls new cities in the desert. The shift underscores the urgency of its mission: to prepare the world’s biggest crude-exporting nation for a post-oil future.