How War Affects the Fuel Market Equilibrium

Pixabay, https://www.pexels.com/photo/silhouette-of-soldiers-walking-40820/

Fuel is the crucial material for modern industry. Although a lot of countries are trying to develop New Energy, which is known as alternative energy that includes sunlight, wind, waves, and so on, fossils fuel still takes a major part of the energy market. Many factors can affect the market equilibrium, yet war might be a negligible factor since we have not had any larger-scale war since 1945. However, the war between Russia and Ukraine broke up in February 2022. Therefore, numerous citizens began to worry about the fuel market because Russia is the single biggest gas exporter and the major producer of other crude materials to a lot of countries, including the US (Said et al., 2022). In this paper, I will explore how wars affect the fuel market equilibrium by increasing military demand, changing public expectation, and disturbing supply chain.

First, the demand curve for oil will shift to the right side at the beginning of a war, but it may shift to the left side after a period of time. To understand the hidden mechanism, we need to recognize that the military departments around the world are big consumers of fuel. According to EIA (U.S. Energy Information Administration), about 123.73 gallons of fuel were consumed in the United States during 2020, which means around 338 million gallons per day (EIA, 2020). Noticeably, the Department of Defense uses about 4.6 million gallons of fuel every year, which takes about 3.74 percent of the total usage in the world (Lengyel et al., 2007). This number is stunning, yet getting involved in a war might further increase it. Plus, due to automatic systems and tactical technology advancement, a modern war might consume more energy than a traditional one. According to Forbes, the armed force used about one gallon of fuel per soldier every day in World War II, while the usage changed to sixteen gallons by 2007 with the involvement in Iraq and Afghanistan (Forbes, 2012). Plus, a war may spread pessimism among the public, thus citizens may stock oil, and the demand curve would further shift to the right. In other words, war will increase the demand for fuel.

Estrada, Mario Arturo Ruiz, et al., Trend in World Crude Prices

However, increasing demand may not last for a very long period. According to the article of Estrada et al., the oil price will increase at the beginning of a war, while the price might decline subsequently to reach the market equilibrium (Estrada et al., 2020). First, the government may take demand-side management to control the oil demand macroscopically (Jaffe and Elass, 2016). Also, it is known that higher fuel prices will reduce oil demand. Plus, if the price of fuel is extraordinarily high, a country’s economic performance might get hurt. Further, the high price of oil may encourage companies to seek alternative energy sources (Estrada et al., 2020). Currently, the oil price rises in the United States after the Russia-Ukraine war, which is partially consistent with the theory in this paper. Yet, we still need more time to figure out if the oil price will decline or not.

https://www.economicsonline.co.uk/competitive_markets/shifts_in_supply.html/

Besides the demand, supply is also a crucial factor affecting market equilibrium. Multiple factors can reduce oil supply, and war is one of them (Smart Energy). The major reason why some countries started wars was oil (Colgan, 2013). If the countries that provide oil were invaded, the oil supply would decline. Therefore, the supply curve will shift to the left side, increasing oil prices. For example, the invasion war of Kuwait by Iraq had reduced the supply of oil tremendously in the 1990s because both Iraq and Kuwait were oil suppliers in the world (Taylor, 1993). Consequently, the oil price surged because of low supply. Likewise, “Arab Spring” had led to the constant increase of oil price in 2011, and the price was even above $113 per gallon (Smart Energy). What’s more, war will undermine the supply chain around the world. Reflecting on the Russia-Ukraine war, a lot of global companies left Russia because of political issues or safety concerns. Also, the flights are being canceled extensively (Campbell, 2022). Currently, the oil price is volatile, while the general price trend keeps increasing. According to the New York Times, the oil price is about ninety dollars per barrel, and it may exceed one hundred in the future (Krauss, 2022). In a nutshell, the war reduces oil supply, and a lower supply will result in a higher price of oil.

Photo by Igor Starkov from Pexels

Ideally, the oil supply should return to its original point after wars in order to reach the initial market equilibrium. However, the time duration for recovery is uncertain. First of all, the industrial of countries that are involved in wars would be hurt tremendously. It may take a long time to return to the original oil supply. Plus, a lower price will result in lower demand. If the oil price remains low after the war as Estrada et al. predicted, producers may not be encouraged to exploit as much oil as they used to do. Further, as discussed before, companies may use alternative energy resources to reduce costs and not change them back after wars (Estrada et al., 2020). However, with the assistance of technology, it may not be that difficult for the oil supply to recover. According to the report of Deloitte, although uncertainty had influenced the fuel market (including oil and gas) in 2022, the recovery time is shorter than people expected, and the performance of the industry is even better than ever (Deloitte, 2022). Therefore, we may expect the fuel market to return to its original equilibrium point after the war. Yet it is also possible that oil prices will decrease because supply does not change compared to the pre-war level, while demand might decrease.

To conclude, once a war starts, the market equilibrium will be disturbed. First, the demand curve will shift to the right, and the supply curve will shift to the left. According to the demand-supply graph, this shift will result in a higher price. However, as discussed before, the demand may not keep increasing because the government will intervene, and companies seek alternative resources. Also, due to the advancement of technology, the supply curve will shift to the right side after wars. Therefore, the price will decline in the future. The examples in the essay, including the Iraq war and Arab Spring, are consistent with this theory. Therefore, this theory should also be valuable for the fuel market during the current Russia-Ukraine war.

References:

Said, Summer, et al. “Oil Producers Including U.S. Weigh Reserve Releases as War Prompts Rise in Prices.” The Wall Street Journal, Dow Jones & Company, 28 Feb. 2022, https://www.wsj.com/articles/oil-natural-gas-prices-vault-as-sanctions-threaten-russias-commodity-exports-11646049246#:~:text=Russia%20is%20the%20single%20biggest,state%2C%20including%20its%20war%20machine. ~

“Frequently Asked Questions (Faqs) — U.S. Energy Information Administration (EIA).” Frequently Asked Questions (FAQs) — U.S. Energy Information Administration (EIA), https://www.eia.gov/tools/faqs/faq.php?id=23&t=10#:~:text=In%202020%2C%20about%20123.73%20billion,8.05%20million%20barrels%20per%20day). ~

Lengyel, Colonel, USAF, Gregory J. (August 2007). “Department of Defense Energy Strategy: Teaching an Old Dog New Tricks” (PDF). 21st Century Defense Initiative Foreign Policy Studies. Washington, D.C: The Brookings Institution. Archived from the original (PDF) on May 29, 2014. Retrieved May 12, 2014.

“The World’s Biggest Fuel Consumer.” Forbes, Forbes Magazine, 12 July 2012, https://www.forbes.com/2008/06/05/mileage-military-vehicles-tech-logistics08-cz_ph_0605fuel.html?sh=76e931cc449c.

Jaffe, Amy Myers, and Japeer Elass. “War and the Oil Price Cycle.” JIA SIPA, 30 Aug. 2016, https://jia.sipa.columbia.edu/war-oil-price-cycle.

Estrada, Mario Arturo Ruiz, et al. “Simulations of US-Iran War and Its Impact on Global Oil Price Behavior.” Borsa Istanbul Review, Elsevier, 7 Jan. 2020, https://www.sciencedirect.com/science/article/pii/S221484501930290X#:~:text=Oil%20prices%20are%20high%20in,4. ~

“Why Do Oil Prices Rise and Fall?” Why Do Oil Prices Rise & Fall | Resources | Smart Touch Energy, https://www.smarttouchenergy.com/resources/why-do-oil-prices-rise-and-fall.

Colgan, Jeff D. “Oil, Conflict, and U.S. National Interests.” Belfer Center for Science and International Affairs, https://www.belfercenter.org/publication/oil-conflict-and-us-national-interests.

Taylor, J. (1993). “Discretion versus policy rules in practice” (PDF). Carnegie–Rochester Conference. Retrieved January 20, 2016.

Campbell, Colin. “Russia’s Invasion of Ukraine Throws Another Wrench into Supply Chains.” Supply Chain Dive, 24 Feb. 2022, https://www.supplychaindive.com/news/russia-invasion-ukraine-supply-chain-risks/619393/.

Krauss, Clifford. “Energy Markets Are Jittery as Russia-Ukraine Tensions Drag On.” The New York Times, The New York Times, 14 Feb. 2022, https://www.nytimes.com/2022/02/14/business/oil-markets-prices.html.

Deloitte. “2022 Oil and Gas Industry Outlook.” Deloitte United States, 23 Nov. 2021, https://www2.deloitte.com/us/en/pages/energy-and-resources/articles/oil-and-gas-industry-outlook.html.

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Undergraduate student / Research assistant/ Always curious / Opinions are mine

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Andrew Chen

Andrew Chen

Undergraduate student / Research assistant/ Always curious / Opinions are mine

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