The global market has already started to feel the pinch of the US sanctions on Russian oil. How much of an impact this will have on other commodities, and how long it will last, however, depends on the extent to which other countries, especially those in Europe, implement these curbs.
Even though the United States has banned the import of Russian oil, liquefied natural gas, and coal, the United Kingdom (UK) has said it plans to reduce oil imports from Russia to zero by the end of this year. Other European countries, including Germany, also are saying the same thing.
The US may not encounter a major difficulty if it does not import oil from Russia. The country has room for importing oil from Venezuela and even from Iran by lifting existing sanctions on those countries. It also has an opportunity to increase domestic production of fuel.
However, the impact of such sanctions will be adverse on countries, even more so those in Europe, that are heavily dependent on Russian oil.
Needless to say, Russia is one of the major suppliers to the global oil market. The Middle East and Opec (Organisation of the Petroleum Exporting Countries) countries do not have the capability to increase the production volume overnight to fully compensate for the withdrawal of Russian oil. As a result, oil prices will continue to rise on the world market, which will leave adverse economic impacts on all countries, including Bangladesh.
Now the question arises – where will Russia sell its oil? I assume China alone can buy all the oil produced in Russia. As such, the sanctions cannot collapse the Russian economy.
The effects of the US embargo would be catastrophic if Russia becomes completely isolated from the world oil market. And this can be done by imposing secondary sanctions.
Russia has not yet announced its future trade relations with the oil-importing countries. If the United States or the European Union imposes trade sanctions on those countries, all countries will have to look for alternative sources of oil.
Bangladesh does not have a tradition of importing oil from Russia. Even if it is available at a lower price, there is no chance of importing oil from the country. Our ready-made garment (RMG) industry is already faced with criticism because of a rather bad reputation with regard to the work environment. In this situation, if Bangladesh starts importing oil from Russia, it will have to lose its export market for hurting the sentiment of foreign buyers.
If the price of oil rises on the world market, we also will have to buy it at high prices. If the price is adjusted in the domestic market in line with the global price hike, the people will have to pay for it. And if the price is not adjusted, the government will have to pay for the extra import costs.
A surge in fuel oil price will cause hikes in prices of electricity, fertilisers, and other mainstays of agricultural and industrial activities. As a result, prices of industrial products and food will also go up.
Prices of all types of commodities have been rising at an unusual rate in recent times on the domestic market for various reasons including rising prices on the world market. If oil prices rise further, commodity prices may go out of control. As a result, a large number of people will lose purchasing power and fall below the poverty line. This will hamper the recovery process from the Covid fallouts.
I have already stated that sanctions on oil imports from Russia will prove counterproductive for European countries, making them face serious financial troubles. Because of an increase in energy expenditure, there may be a tendency to reduce the expenditure in other sectors in those countries. European countries may even have to face stagflation.
It goes without saying a decline in the purchasing power of the Europeans will actually be a big blow to our garment exports. Thus the recovery process in this sector will also be hampered.
Like in other developing countries, macroeconomic management will be a big challenge in Bangladesh in the coming days. The government does not have much to do to address this challenge. But, the decision to adjust oil prices will have to be taken judiciously.
I do not think the global oil market will remain volatile for long. As such, the authorities should wait a while before adjusting the price in the domestic market.
But it is also true that the government has been subsidising oil prices for a long time, and both the rich and the poor are getting benefited from this subsidy. If the issue of fairness is taken into account, the benefit of subsidy should be given only to the poor.
Besides, the government does not have the capacity to provide subsidies for a long time.
It would be best to adjust the price of oil and implement programmes such as cash assistance or food assistance at subsidised prices or for free for the poor. However, this is not possible because of the lack of a proper database and efficient management.
To cope with the increased pressure, we need to be more efficient in the use of oil and electricity in the future. Effective use of the already installed solar panels needs to be ensured. And the power plants operated at very low efficiency should be shut down and the economical plants should be put to use.
Zahid Hussain spoke to TBS Senior Reporter Jahidul Islam over the phone.