Energy Price Shocks and Geopolitical Conflict
Few things hit consumers’ wallets as directly as energy costs, and the early 2020s delivered a brutal energy shock. The price of oil, natural gas, electricity, and motor fuels surged to multi-year highs in 2021–2022, sending household utility bills and gasoline expenses soaring. This energy crunch was global in nature – hence its inclusion among the “80% global factors” behind the cost-of-living crisis, as Britain’s central bank governor noted – but it hit Europe especially hard, given Europe’s heavy reliance on imported energy. The Russia–Ukraine war, which began in February 2022, greatly amplified this crisis by upending global energy trade flows.
Initially, energy markets were already tightening in 2021 as the world economy recovered from COVID. During the pandemic’s height in 2020, demand for oil and gas collapsed, leading producers to slash output. When demand roared back in 2021, supply was slow to adjust. OPEC and other oil producers, burned by the 2020 price crash, were cautious in ramping up production. The result: by late 2021 oil prices had risen above $80 per barrel (from <$40 in mid-2020), and benchmark natural gas prices in Europe and Asia were setting records. A global energy crisis (2021–2023) took shape, characterized by shortages and soaring costs for fossil fuels and electricity. Natural gas in Europe, for example, hit unprecedented heights – several times higher than normal – feeding directly into higher electricity prices (since gas-fired power plants often set the market price for electricity). By late 2021, European households were already seeing sharply higher utility bills, and gasoline prices were climbing worldwide, contributing substantially to inflation.
Then came the shock of Russia’s invasion of Ukraine in February 2022. Russia was a major exporter of oil and the primary supplier of natural gas to Europe, so the war (and ensuing sanctions and Russian cutoffs) sent energy markets into turmoil. Global oil prices spiked over $100/barrel, gasoline hit well over $4–5 per gallon in the U.S. (and equivalent levels elsewhere), and natural gas in Europe reached catastrophic highs – at one point 15 times its usual price, as Russia slashed gas flows to retaliate against European sanctions. This translated into nightmare utility costs: European families saw gas and electric bills double or triple within months. The U.K.’s household energy price cap was raised 54% in April 2022, and without government intervention it would have jumped ~80% in October. One estimate in mid-2022 warned that an additional 11 million Europeans could be pushed into poverty due to energy inflation alone. The situation was so dire that governments from France to Bulgaria rolled out emergency subsidies, tax cuts on energy, and price caps to shield consumers.
Energy inflation hit the U.S. public as well, though less severely than Europe. American gas prices averaged over $5/gallon in summer 2022 – a record high that squeezed commuters and contributed to the U.S. cost-of-living squeeze. Fuel and transportation costs have an outsized impact because they cascade through the prices of other goods (if it costs more to ship food to the store, the food gets pricier). Indeed, higher oil and gas prices were “a major contributor to inflation as oil producers saw record profits” during this period. For example, the cost to heat a home with natural gas or fuel oil jumped markedly in late 2021/2022, straining household budgets especially in colder regions.
What caused this energy crunch? On one level, basic supply and demand imbalances. The rapid post-pandemic rebound in 2021 outpaced the restoration of supply. Oil producers had idled wells; coal mines had closed; investment in new capacity was down – leaving too little energy when consumption picked up. Add to that specific disruptions: maintenance backlogs, weather events (2021 saw weak winds in Europe and drought in China, reducing renewable and hydro output), and then the war. The war not only removed a chunk of supply (as Russian exports were constrained) but also caused panic and uncertainty in markets, driving prices higher on expectations of shortages. European countries scrambling to replace Russian pipeline gas started buying up shiploads of liquefied natural gas (LNG) from the U.S., Qatar, etc., which drove global LNG prices skyward. As Europe paid top dollar for LNG, countries in Asia or Latin America that relied on imported gas found themselves priced out, experiencing blackouts or having to revert to dirtier fuels. The global nature of energy markets meant everyone felt the crunch one way or another.
Geopolitics and market structure also played a role. Critics pointed out that OPEC and allied producers benefited from the high prices and were in no rush to significantly increase output; some accused them of market manipulation or at least indifference to the pain of importing nations. Energy companies, especially in the oil and gas sector, enjoyed windfall profits – leading to calls for windfall taxes (the U.K. notably implemented a £5 billion energy profits levy to help fund relief measures). In effect, there was a transfer from consumers to producers. This has sparked debate about “energy profiteering”: whether companies took advantage of the crisis to pad margins. For instance, while crude oil prices eventually eased from their 2022 peak, consumer fuel prices were slow to fall, boosting refiner and retailer profits, which angered politicians and the public. The Groundwork Collaborative reported that in the U.S., input costs for producers rose only ~1% in a recent year while consumer prices rose 3.4%, suggesting companies kept prices high even as their own costs dropped.
The energy shock was especially devastating because energy is a necessity: households cannot easily cut back on heating, cooling, cooking, or commuting without sacrificing well-being. And lower-income households spend a larger share of their income on energy, making the spike regressive. In the U.K., effective inflation for the poorest was several percentage points higher than for the richest in 2022 (12.5% vs 9.6%), largely because of energy and food costs. Elderly people on fixed incomes also suffered disproportionately – for those over 80 in Britain, the effective inflation rate hit 15% in late 2022 due to heating expenses.
Fortunately, by 2023 energy prices had moderated. Oil fell back to the $70–90 range, and Europe managed to fill gas storage and survive the 2022–23 winter with less Russian gas than feared. Natural gas prices in Europe by mid-2023 were about one-quarter of their 2022 peak. These declines helped pull headline inflation down (the sharp drop in energy costs was responsible for nearly 60% of the decline in key input costs since mid-2022). However, for consumers, energy bills are still much higher than pre-crisis. Many utilities locked in higher prices or are only gradually lowering rates. And the geopolitical risk premium remains – Russia’s supply is mostly off the table, and OPEC continues to manage output to keep prices from collapsing.
The energy crisis underscored the vulnerability of import-dependent regions and has accelerated policy shifts. Europe is rapidly investing in alternative gas suppliers, renewables, and even rethinking nuclear power to reduce reliance on volatile fossil fuels. The U.S. has been releasing oil from its Strategic Petroleum Reserve to temper gasoline prices and is now considering turning it into a broader “Strategic Resilience Reserve” to buffer energy markets. In the long run, a transition to more stable and domestic energy sources (like renewables) is seen as crucial for energy price stability. Indeed, analysts note that the spikes in inflation closely tracked fossil fuel price swings – when energy prices fall, inflation drops; when they rise, families suffer. The promise of renewables is not just environmental but also as a shield against the kind of price shock that contributed so much to the current cost-of-living crisis.