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Oil Should Stay In Triple Digits: Analyst

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Energy Affordability: The Issue Everyone Is Ignoring

  • The root cause of the quickly-rising cost of living in Western countries is rising energy costs.
  • UAE Energy Minister: politicians are focusing on geopolitics, but aren't openly recognizing the real reason behind rising energy costs.
  • More households in Europe at risk of energy poverty,

The U.S.-EU deal for the import of an additional 15 billion cubic meters of liquefied natural gas this year made headlines earlier this month, with both sides praising their own political prowess and quick action. What nobody talked about was how much this LNG would cost.

Meanwhile, another piece of news that grabbed headlines was the House hearing of half a dozen U.S. and international oil executives on allegations of price-gouging and not helping regular Americans "to relieve pain at the pump, instead lining their pockets with one hand while sitting on the other," according to two legislators.

These two events are indicative of something that no politician in power would want to admit openly but is nevertheless happening: the cost of living in Europe and the United States is rising. And the root cause of this is not the war in Ukraine. It's high energy costs.

It was the energy minister of the UAE who shone a light on the problem earlier this week. Speaking to CNBC at the World Government Summit in Dubai, Suhail al Mazrouei said that politicians are focusing too much on geopolitics and ignoring the issue of energy affordability, which is affecting both developed and developing economies.

If they continue to ignore this issue, he said, politicians risk seeing large parts of the world plunged into energy poverty, which would, in turn, lead to economic slowdown for much of the world and global stagnation. Related: Vitol: Oil Is Underpriced For Current Supply Risks

Noting that OPEC+ was doing its best to provide a reliable supply of energy to global markets, Al Mazrouei said, "For that to happen, we need resources – financial resources – we need to invest and we need to decouple politics from energy availability and energy affordability."

By "politics", the Emirati official likely means energy transition agendas in Europe and the United States. These depend on lower investment in oil and gas production, and the European gas crunch was the first clear sign what the consequences of this approach could be, because, in all fairness, the European cost of living crisis began a lot earlier than the war in the Ukraine.

In November last year, for instance, six in ten Britons said they had seen an increase in their cost of living. This month, this has risen to eight out of ten as energy costs continue higher. From next month the number could rise further after the energy market regulator introduces the new energy price cap by close to $1,000 per household for some 22 million households.

In Germany, inflation is seen accelerating to 6.1 percent this month, from 5.1 percent in February, according to the Ifo Institute. Soaring energy costs are at the root of this inflation trend, with the Ukraine war now adding inflationary pressure on some food staples as both Ukraine and Russia are big producers. According to Ifo, Germans could lose more than $6 billion in purchasing power by the end of this month alone. Related: U.S. Drilling Activity Has Risen 60% In One Year

In France, the rising cost of living has boosted the election chances of far-right candidate Marine Le Pen, who is betting strongly on messaging that addresses the purchasing power concerns of French citizens who, like their fellow EU-members in Germany and Britons in newly "exited" UK, have been struggling with rising costs of living.

In the United States, the Fed is preparing for an aggressive push into rate hikes to rein in inflation, which has led several economists, among them Mohamed El-Erian, to warn that such an aggressive step could lead to a cost-of-living crisis. Meanwhile, the White House has announced yet another release of oil from the strategic petroleum reserve in an attempt to cool prices at the pump.

Right now, politicians on both sides of the Atlantic are happily blaming everything on Russia's President Vladimir Putin. However, sooner or later, the dust will settle, and people will start asking why even though the war is over, energy is still more expensive than it was before. That would be one tough question to answer unless those who may have to answer it heed the warning made by the UAE's Al Mazrouei.

By Irina Slav for Oilprice.com

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Leave a comment
  • Lee James on April 06 2022 said:
    I don't know, I saw prices rising in general before Russia attacked Ukraine. COVID was really tough on adequate staffing levels; labor costs were rising.

    We have commodity prices in general going up as we increasingly experience mineral and metals scarcity.

    We've had a lot of crummy weather around the globe, making food production really tough in many areas.

    In the past, it has been easy to put the finger on rising energy costs to explain overall cost-of-living increases. No, I think it's a perfect storm kind of thing where energy is just one of the low, low pressure systems that has moved in.

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