December's Energy Price Surge: A Geopolitical Perspective

The energy market witnessed a significant price surge in December, with both oil and natural gas prices reaching multi-year highs. While various factors contributed to this trend, geopolitical tensions played a pivotal role in driving these price fluctuations. This article explores the specific geopolitical events that contributed to the December energy price surge and examines how these dynamics differ between oil and natural gas markets.



The Russia-Ukraine conflict, which began in February 2022, had a substantial impact on energy prices. Russia, a major energy producer, faced severe economic setbacks due to sanctions, with its GDP contracting by 5.5%. This conflict also benefited other energy-producing countries, such as the Middle Eastern oil-producing countries, Australia, Canada, Mexico, and Southeast Asia, which experienced economic benefits from the global energy market's "crowding-out effect" (Source: "The economic impact of soaring international energy prices during the Russia-Ukraine conflict from February 23, 2022, to May 31, 2022").

The US-China trade war, which took place during the Trump administration, also influenced energy price volatility. The trade war led to a decline in Chinese production, which resulted in a drop in oil demand and significant volatility in crude oil prices (Source: "A recent example can be provided by the Trump administration period, during which the relationship between the two countries was taut due to various events such as the trade war, Hong Kong’s judicial independence, intellectual property issues, and the international status of Taiwan. As recalled by Cai et al. (2022), the trade war between China and the US has provoked a decline in Chinese production due to (i) the rise in tariffs on imported Chinese goods imposed by the US and (ii) the increase in tariffs on a list of several imported US products decided by China. This fall in Chinese production led to a drop in consumption and demand for oil. Coupled with a strong supply, this decrease in oil demand has given rise to significant volatility in crude oil prices.").



Geopolitical risks, such as wars and political conflicts, can directly impact energy supplies, demand, and prices. For instance, maritime routes used for transporting oil and liquified natural gas are vulnerable to geopolitical tensions and disruption, which can result in restricted energy resources and significant price volatility (Source: "The Role of Oil in the Global Energy Market").



Energy market dynamics differ between oil and natural gas due to their unique characteristics, infrastructure, and market structures. Here's how they differ and how geopolitics impacts each:

1. Oil Market Dynamics:
- Globalization and Interdependence: The oil market is highly globalized, with a significant portion of oil traded internationally. This interdependence makes the oil market vulnerable to global geopolitical events (Bataa & Park, 2017).
- OPEC Influence: The Organization of the Petroleum Exporting Countries (OPEC) plays a significant role in determining global oil supply. OPEC can decide to increase or decrease production in response to political or economic circumstances, directly influencing oil prices (Brew, 2019).
- Strategic Reserves and Stockpiling: Many countries maintain strategic oil reserves to ensure energy security and mitigate the impact of supply disruptions. These reserves can be released during crises to stabilize prices (Hamilton, 2003).

2. Natural Gas Market Dynamics:
- Regionalization and Interconnectivity: Natural gas markets are often regional, with gas transported across borders by pipelines. This regionalization makes natural gas markets susceptible to local geopolitical risks (Cang et al., 2020).
- Pipeline Politics: Natural gas is typically transported across borders by pipelines, making it susceptible to geopolitical risks. For example, Europe largely depends on Russian gas, supplied through pipelines which travel through Ukraine and Belarus. The political unrest between Russia and Ukraine has led to disruption in supply, especially during winter when demand rises (Custers, 1991).
- Liquefied Natural Gas (LNG) as a Geopolitical Tool: Countries with large LNG export capabilities, such as the United States and Qatar, have begun using LNG as a geopolitical tool to offer energy alternatives to nations reliant on more politically unstable regions. Shifts in LNG supply can cause regional price fluctuations as importing nations seek to diversify their supply sources away from geopolitical risk zones (Cruz & Krausmann, 2009).

Geopolitics impacts both oil and natural gas markets, but the nature of the impact differs due to their unique dynamics. Understanding these differences and the geopolitical factors at play is crucial for investors, policymakers, and energy market participants to make informed decisions and mitigate risks.

In conclusion, December's energy price surge was significantly influenced by geopolitical tensions, with specific events and factors driving changes in supply, demand, and ultimately, prices. The Russia-Ukraine conflict, US-China trade war, and geopolitical risks contributed to the surge in energy prices. The dynamics of oil and natural gas markets differ, with geopolitics impacting each in unique ways. Investors and policymakers must be aware of these geopolitical factors to navigate the complex energy market landscape and make informed decisions.