If the backdrop of global inflation wasn’t already worrying enough, the conflict in Ukraine stands to make matters worse, with energy research and consultancy firm Wood Mackenzie forecasting that the implications on commodities, energy policy, and the energy transition could well and truly leave a lasting mark on the world economy.

The world’s dependence on Russia for certain commodities cannot be overstated ‒ from gas, coal, oil, iron ore, aluminium, platinum group metals and zinc to copper, lead, petrochemicals, and fertilisers.


Crude oil and refined products: too big to fail?

Russia is one of the world’s biggest oil and gas producers – in BP’s 2021 Statistical Review of World Energy the country produced 10.1 million barrels per day (BPD) of crude oil and natural gas condensate in 2021, coming in second place behind the US at 11.3 million BPD and Saudi Arabia in third place at 9.3 million BPD.

As much as 2.3 million b/d of Russia’s 4.6 million b/d of crude oil exports go to the West and the US has made it clear it does not intend to impose direct sanctions on Russia’s oil exports, WoodMac researchers highlighted in its latest report.

“Russia and Saudi Arabia are partners in an OPEC+ production restraint agreement but in the case of an actual oil supply cut, OPEC would be more likely to consider using spare capacity to help offset losses, rather than raise output above target levels.

“Barring a sustained slowdown in exports, the upward momentum in oil prices is likely to ease,” WoodMac said.

“In the longer term, we do not expect consuming nations to avoid Russia’s oil, given that its exports move into an open, fungible market that does not require close ties between countries.”

The impact of Russian diesel/gas oil is of greater significance to Europe, WoodMac said, as the region imports more than 8% of its demand from Russia.

“Fuel oil and residues are traded globally and often consumed as feedstocks by US Gulf Coast refiners or as bunker fuel for commercial shipping in Asia. As with crude oil, we do not expect a turn away from Russia’s refined product exports,” it said.

“We do not expect a demand surge based on gas-to-oil switching if the crisis affects Russia’s gas exports.

“Fuel switching demand for heating in Europe is limited to Germany. In the power generation sector, European oil-fired capacity is either idled or shuttered, limiting the upside to oil demand.”



The conflict in Ukraine is already piling pressure onto a European gas market that was already going through its word crisis on record, WoodMac researchers said.

Europe relies on Russia for around ~40% of its natural gas and most comes through pipelines including Yamal-Europe, which crosses Belarus and Poland to Germany, Nord Stream 1, which goes directly to Germany, and via Ukraine.

But if the EU was to stop all Russian gas flows, the long-term implications could be severe, WoodMac said, with Russia set to lose a hefty amount as well.

At current prices, “it would give up US$7.5 billion of revenues a month, possibly more” and in the tussle between Russia and the EU over gas imports, business as usual remains the most pragmatic, and likely, outcome.

“The invasion, though, will push the EU to question its dependency on Russian gas” the research firm said, although “new supply will take time to materialise and will see higher prices in the medium term.”

Hopefully the crisis will also push the continent to rethink the role of gas in terms of decarbonisation as “higher gas prices make a stronger case for renewables as well as alternative gases such as bio-methane and green hydrogen.”



With Russian coal accounting for around 30% of European metallurgical coal imports and more than 60% of European thermal coal imports – having to replace Russian coal volumes would “send a price shock to global coal markets”, the firm said, and a coal shortage in Europe.

Coal-fired power currently accounts for around 14% of Europe’s generation mix.

“The impact on European power markets from a Russian coal shortage would not be as significant as gas – crucially, though, Europe may not be able to depend on coal plants to make up for gas-fired generation losses.”



The short-term impact of the situation in Ukraine is likely to be felt through two main petrochemical channels: energy prices and sanctions.

Any additional premiums will probably have to be absorbed in the form of reduced margins, WoodMac said.

“The precise impact of sanctions will depend on their final form.

“Russia accounts for just under 16% of total European petrochemical production, with its highest exposure in the polyethylene chain.

“This makes Russia an important – but not critical – contributor to the industry.”



Ukraine has few metal extraction and processing production facilities of scale, so the disruption to production will have a relatively small impact globally, but the greater consequence are any limits on the ability of Russian producers to import raw materials to or export finished products from Russia, WoodMac highlighted.

“As sanctions ratchet up, any metals and mining companies whose shareholders have links to the Kremlin are at risk.”



While Russia’s economy is in a better position to withstand sanctions than it was in 2014 when it annexed Crimea, WoodMac researchers say the conflict will hurt Ukraine’s economy most and if energy flows are affected, the global impact could be severe.

“Neither Russia nor the Western allies will want to disrupt flows, but it cannot be ruled out,” it said.

“Russia has built a reserve cushion that could soften the impact of sanctions short term and being frozen out of international bond markets means new sovereign debt needs to be financed domestically.”

Reserves cover the US$50 billion due in principal repayments on government debt through 2025, WoodMac said.

“In Ukraine, the conflict risks disrupting economic activity and causing damage to capital stock.

“Its economy is likely to be back in recession in 2022 unless the situation de-escalates quickly.”