War and Energy Shock

Words like “war” have recently gained prominence around the world as a result of Russia’s invasion of Ukraine on February 24th. The conflict between these two countries has not arisen now, however, reasons such as the expansion of NATO towards Eastern Europe and the possibility of Ukraine becoming a member, as well as Vladimir Putin’s ambition to re-establish and increase his influence in the Soviet Union, led to the current massacre that is being experienced in these countries. Consequently, a path towards the financial and geopolitical imbalance of these nations has been observed, which in turn are threatening trade relations on a world scale.

One of the questions that arises is what impacts this conflict will have on the economy, and some of the immediate effects included the fall of the stock market and the increase in inflation. According to AICEP, in 2020, Russia represented the 3rd producer of oil, 3rd producer of natural gas and the 4th producer of electricity, worldwide. In Ukraine, the production of cereals stands out, being one of the main suppliers of corn in Portugal. With regard to imports, Portugal is not totally dependent on these countries, since most of its natural gas (49%) comes from Nigeria (only 10% comes from Russia) and has not imported crude from Russia since 2020 (DGEEG, 2022). In terms of exports, Portugal mainly sells cork to these two countries.

Although Portugal may be one of the countries with the least exposure to this conflict, some negative effects are already being felt, and an example of this is the increase in fuel prices (consequence of the increase in the price of a barrel of oil that has already exceeded 100 USD) and natural gas. On 07/03/2022, the price of natural gas reached €340 per MW/h, an increase of around 200% since the beginning of the year. Furthermore, in 2022, the price of electricity in the Iberian wholesale market reached an all-time high, around €500/MWh (increase of 300% since January 2022), which is partly due to the increase in the price of gas that for in turn, it is used in power stations (Jornal Público; Jornal Observador; OMIE; 2022). Although there had previously been a continuous rise in prices, largely driven by the pandemic, the war intensified this effect.

Although there is still great uncertainty about the impacts that this invasion could have on the rest of Europe, it is certain that Portugal will not be safe from the negative effects of this conflict and the slowdown in the world economy.