The conflict between Russia and Ukraine has led to big fears about the impact it will have on energy prices and the wider economy. Here we look at what this might mean for already hard-pressed households.
As Russian troops advance further into Ukraine the threat of an all out war and tit-for-tat trade sanctions between Europe and Russia has increased.
But what impact, if any, is this going to have on consumers in Ireland?
The recent aggression we’ve seen from Russia is nothing new.
In 2008 it went to war with Georgia, and almost 15 years later, around 20% of the country’s territory is still under Russian military occupation. And in 2014 it invaded and subsequently annexed Crimea in Ukraine.
The roots of Russia’s aggression towards Ukraine largely lie in the widening divide between Moscow and Kiev since Ukraine signalled a turn towards the EU and Nato after its "orange revolution" in 2004. Up until then, Ukraine had largely been considered ‘pro Russia’ and Russia had been pushing for its own economic union with the country.
The fact that Russia received little rebuke or serious sanctions from the West after both invasions seems only to have spurred Putin on.
However with a full-scale invasion of the rest of Ukraine on the cards, as well as the risk of an all out war, Europe may finally be forced to confront Russia and impose harsh sanctions.
But how will that impact energy prices and the wider economy?
Russia - the home of gas and oil
Russia has vast energy reserves and is one of the biggest exporters of oil and gas in the world - the lifeblood of the world economy really.
Around 40% of Europe's gas and 27% of its oil comes from Russia, according to Eurostat.
In other words, Europe isn’t very self-reliant when it comes to energy and has a huge dependency on Russia.
So if Europe imposes severe sanctions on Russia there are fears Putin will retaliate by cutting off Europe’s energy supplies - leaving us cold and potentially out of pocket!
Russia did this before to Ukraine in 2006, in fact, in a supposed dispute over gas payments.
Ireland gets around 40% of our gas from our own reserves and the rest via the UK, which in turn imports a lot of gas from Norway. So we have little direct exposure to Russia. But if Russia turns off the taps for Germany, then the Germans will then have to look elsewhere (to Norway for example) and this would then affect us.
In Ireland gas is also used to generate up to 50% of our electricity. This is among the highest in Europe but other countries rely significantly on gas to generate their electricity too.
So any increase in the price of gas will also impact hugely on our electricity bills.
Nowadays we only use oil to generate around 2% of our electricity so the price of oil doesn’t hugely affect electricity prices anymore - but it does affect petrol and diesel prices.
How will energy prices be affected?
Last year was a pretty dismal year for energy customers. There were over 35 price hike announcements from suppliers and gas and electricity prices reached record highs.
At the same time, the price of a barrel of oil has begun to creep steadily upwards and is now close to multi-year highs of $100 a barrel. This has meant record prices at the forecourt for motorists.
Energy prices were increasing long before the recent conflict kicked off. The reasons for the increase in prices were varied and include supply chain bottlenecks due to covid, a lack of wind output, and high demand for energy.
However in recent weeks the threat of a conflict between Russia and Ukraine has also put pressure on prices, meaning they could reach new heights, putting huge pressure on household finances.
|Electricity increase vs October 2020||Gas increase vs October 2020||Estimated increase in yearly bill*|
|Bord Gáis Energy||34%||28%||€540|
*inclusive of VAT and based on supplier's 24-hour urban rate and a household using an average amount of gas and electricity as defined by the CRU. Increase also factors in changes to daily standing charge.
Gas on the rise
For most of 2020, gas traded at around 40 to 45 pence per therm on the UK wholesale market (this is the best proxy for Irish gas prices as most of our gas is imported into Ireland at these prices).
It’s now trading at around 200 pence. So that’s over a fourfold increase.
However, back in December when tensions between Russia, Ukraine and Europe were escalating, it went to over 400 pence at one stage.
Most energy suppliers try mitigate against the volatility of energy prices by buying some of their fuel months or even a year or so in advance through hedging. So in 2021 when gas and electricity prices were skyrocketing, energy suppliers were able to shield households from the worst of it as they had bought most of their fuel at 2020 prices.
For example gas and electricity prices in Ireland have ‘only’ increased by between around 25% and 70% since late 2020 despite a c. 200% increase in the price of gas.
Unfortunately many suppliers' hedging contracts are now coming to an end meaning suppliers will have to buy at today’s prices, which are hugely elevated. In short, unless the price of gas drops dramatically over the coming weeks, we could see further price hikes for gas and electricity customers.
In May, an increase in the carbon tax will also see the average annual gas bill rise by close to €20 a year.
The escalating conflict is also putting pressure on petrol and diesel prices, which are at record highs, as oil comes close to $100 dollars a barrel.
Food inflation is beginning to rise. At 2% it’s at its highest level in years (up from -2% this time last year) and could reach close to 5% over the coming months.
This is due to supply chain disruptions due to Covid, a lack of lorry drivers, an increase in Brexit-related tariffs and charges, and an increase in the price of fertiliser on the back of soaring gas prices (nitrogen fertilizer is produced from natural gas).
Russia accounted for 22% of Ireland’s total fertiliser imports in 2020, according to the Central Statistics Office. So if heavy trade sanctions are placed on Russia, this could impact further on food prices - both due to an increase in the price of gas as well as a lack of supply of fertiliser itself.
In December inflation hit an over 20-year high of 5.5%. It’s since fallen back slightly to 5% but could spike further over the coming months if gas, electricity, and petrol and diesel prices spike much higher.
This is likely to lead to aggressive wage demands from employees and unions and could lead to industrial unrest.
Meanwhile people who are on fixed incomes, such as most pensioners, are likely to be particularly badly affected.
How to combat rising inflation
If you’re looking to fight back against the rising cost of living, we’re here to help. As mentioned above, rising energy costs have had a significant impact on households this year, but the good news is that energy is one of the easiest household bills to save on.
For more savings tips, take a look at our blog on how to beat rising inflation.