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New Policies are Needed to Tame Inflation and Strengthen Energy Security

As the conflict in Ukraine continues, Russia’s strategy to weaponize commodity exports to restrict supply to governments in support of Ukraine is impacting not just oil and natural gas, but economic policy too.

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By Helima Croft
Published August 5, 2022 | 2 min read
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Key Points

  • With no sense of when the volatile environment will settle, taming inflation is a difficult challenge.
  • Diversification of supply is key to helping tame prices and bring greater energy security amid the energy supply crisis.
  • But there is always the prospect of further supply shocks in future, which need to be factored into robust economic and energy policies.

In an already tight supply and demand situation, the consequences of the supply shock from the Russia-Ukraine conflict across energy and food have left Western economies with thorny dilemmas in economic and energy policy.

The energy impact has left Europe facing the prospect of a “winter of discontent” during which it may have to move forward with rationing, industrial curtailment, and its people potentially having to choose between heating and eating. Economically, there’s enormous pressure on Western governments to deal with the inflation that’s come off the back of rising prices.

Branching out

Without the ability to know when the conflict will end, governments are struggling with inflation and the rising cost of living and diversifying energy supplies must play a part in reigning those costs in. At the same time, governments need to ensure energy security and factor in the energy transition.

There’s no indication that OPEC producers are looking to part ways with Russia. Currently, the producer group has to thread the needle as it comes under pressure from Western governments to supply more barrels to the market while simultaneously trying to ensure it keeps Russia as part of OPEC+. That’s not an easy balancing act.

The next shock?

As they diversify supply, governments also need to be aware of the potential for further supply shocks down the line – whether through underinvestment in the transition or other volatile producers.

“A country like Libya, what happens if they lose exports where we already have a tight market, when OPEC does not have that many more barrels they could bring to bear to try to cool off a rally?”

Helima Croft, Head of Global Commodity Strategy and MENA Research, RBC Capital Markets

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Amid fears about recession, energy security and further shocks, Western governments need to devise economic and energy strategies that will build into a long-term solution.

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