Western Economies Are Creaking Under High Oil and Gas Prices, With No Relief in Sight

The US economy is continuing to sputter and the price of oil has collapsed. Despite these setbacks, many are still predicting a robust recovery in 2019. One reason for this optimism may be that Western economies have become so dependent on fossil fuels that they cannot survive without them.–

The “which of the following is not a characteristic of the united states economy” is a question that has been asked many times before. The answer to the question is: The United States does not have any characteristics.

The chance of a normalization in oil prices is fading as the crisis in Ukraine continues on and Western sanctions against Russia tighten, heightening the conflict’s toll on global economic development, with Europe appearing especially vulnerable.

Energy prices spiked again after Russia’s Feb. 24 invasion of Ukraine, reflecting fears that oil and gas supplies from one of the world’s top producers may dry up due to military action, Western sanctions, or reprisal by Moscow.

Given Russia’s failure to achieve a quick triumph, experts believe energy prices will not decrease considerably this year and may possibly climb further, even in the absence of further sanctions, as the West shuns Russian oil and gas, reducing the global supply of hydrocarbons available to it.

This implies that inflation will likely remain high for longer than expected when the invasion started, putting a strain on consumer purchasing power and driving up manufacturing costs.

Shell CEO Ben van Beurden stated last week, “We are fully aware of all the issues that rising energy prices entail.” “The expense of life has increased dramatically.” Many folks are in excruciating discomfort.”

Because many individuals find it difficult to cut their energy usage, economists predict increasing electricity, heating fuel, and gasoline costs will limit how much money families can spend on other products and services.

All except the greatest energy exporting nations will likely suffer as a result. According to JPMorgan economists, the 20% increase in gasoline costs in the United States as a result of the invasion of Ukraine may be reducing expenditure on other products and services by $9.6 billion a month.

Unlike the United States, Europe imports the majority of its energy. As a result, when prices increase, a large portion of the extra expenditure by consumers and companies goes to Russian, Middle Eastern, and North African suppliers. As Europe seeks to minimize its reliance on Russian energy, part of it is diverted to the United States, which is rapidly becoming a major supplier of liquefied natural gas to the eurozone.

This means there is even less money available to spend on products and services produced inside the currency region, particularly since that Russia is unable to purchase European goods due to sanctions. Higher energy costs in the United States tend to shift spending power toward energy-producing states and people who own or work for energy-producing companies.


In Bucha, Ukraine, destroyed Russian military vehicles sit in a waste dump.

Efrem Lukatsky/Associated Press photo

In April, household energy costs in the eurozone were about 40% higher than a year earlier, the largest single-year rise since the 1970s, despite a succession of big yearly increases throughout that decade.

While the US economy shrank in the first quarter, consumer spending increased significantly. Although detailed numbers for the eurozone take longer to produce, both France and Spain, the currency area’s two biggest members, showed decreases in household spending.

SEB, a Swedish bank that specializes in corporate financing, dropped its U.S. economic growth projection for this year to 2.6 percent from 3.5 percent, but almost halved its eurozone forecast to 2.1 percent from 4 percent.

Carrefour SA, one of France’s major grocery chains with operations all over the globe, said it is pressuring suppliers to hold off on raising prices as long as possible.

“We’re doing all we can to safeguard our clients’ buying power,” Carrefour’s chief financial officer, Matthieu Malige, said last week.

During the epidemic, European consumers, like their American counterparts, accumulated considerable savings. However, considering how quickly costs are growing and salaries have remained constant in Europe, buying power is rapidly diminishing.

Economists at the European Central Bank believe that the transfer of spending power out of the eurozone due to increasing energy costs amounted to 1.3 percent of GDP in the last three months of last year. After then, prices have escalated, especially since the invasion.


Carrefour said it is pressuring suppliers to hold off on raising prices for as long as feasible.


“Because oil and gas are predominantly imported into the euro area, this represents a significant unfavorable terms-of-trade shock, lowering the euro area’s aggregate real income,” said Philip Lane, the ECB’s top economist, in a speech last week.

The Bank of England is facing the same problem as it hikes interest rates to battle inflation, putting the brakes on an economy that is already faltering due to increasing energy costs.

While policymakers raised the main interest rate for the fourth time in a row on Thursday, they also cautioned that the British economy would be on the verge of a recession in the following year. This bleak outlook is partly due to rising energy costs, which increased by 54% in April and are predicted to increase by 40% in October.

“I understand the difficulties this will create for many individuals in the United Kingdom, especially those on low incomes,” said Andrew Bailey, governor of the Bank of England.

The first signs of a slowdown have already appeared. Unlike the United States and other major countries, the United Kingdom provides monthly GDP numbers. Sanjay Raja, an economist at Deutsche Bank, believes the British economy “flatlined” in March and that a recession is anticipated in the three months leading up to June.

The growing cost of living has begun to eat into John Risby’s alcohol-free beverages company’s revenues in recent months. Consumers are turning to cheaper soft drinks and avoiding more costly nonalcoholic beers and wines as their pockets become tighter, he added.

Mr. Risby, a director at the east England-based The Alcohol-Free Shop, said, “I believe we all have to cling on and just hope that we can escape a recession.”

The region’s production capability would be damaged more harder if Russian oil and natural gas supplies were cut off completely before European nations could find other sources.

“We can’t entirely predict what would happen if there is a gas cutoff,” Herbert Diess, CEO of German automaker Volkswagen AG, said this week. “We’re trying to be as tough as we can.”


In the Dutch port of Rotterdam, there is a Shell oil refinery.

ANP/Zuma Press photo

Higher energy prices do not only affect European consumers. Employers, particularly energy-intensive manufacturing, are also concerned.

CamdenBoss Ltd, a British plastic components maker, has seen an increase in orders, but increasing oil prices have increased the cost of its essential raw material. In the meanwhile, employees are seeking greater salaries to keep up with inflation, and major consumers are resisting paying higher costs.

Profits are being eaten away by this combination. Katy Davies, the company’s managing director, expressed concern that there are “no more levers to pull” in terms of cost-cutting, which she prefers not to do.

“It’s difficult,” she said. “When it comes to the inflation spiral, where does it end?” It is becoming more urgent.”

While a dramatic economic downturn in Europe looks to be unavoidable, some experts believe the region may escape a recession. Some of the pandemic-era savings are still available to Europeans.

Another benefit is that the epidemic will pose less of a danger to typical European summer vacations this year than in the previous two years, potentially boosting southern European economies.

“While consumers are delaying purchases of durable items, they are ready to return to the beaches after Covid-19 kept many of them away,” said Holger Schmieding, an analyst at Berenberg Bank in Germany.

—This essay was co-written by Matthew Dalton, Jenny Strasburg, and William Boston.

Paul Hannon and Alistair MacDonald may be reached at p[email protected] and [email protected], respectively.

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The “why is gas prices so high” is a question that has been asked for years. There have been no significant changes in the price of oil and gas since 2014. The Western economies are creaking under the weight of these high prices, with no relief in sight.

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