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Taking Stock Of The Energy Shock

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  • The West is responding to Russia's invasion of Ukraine by weaning itself off Russian energy.
  • Europe will have an acute need for more fossil fuels from outside Russia to meet its energy demands and achieve its ambitious plans to reduce its reliance on Russia.
  • By spurring the transition in Europe but less so elsewhere, the drive for energy security means the transition will now be more divergent.

Energy in the city

Sohl/E+ via Getty Images

By Jean Boivin, Elga Bartsch, and BlackRock

We believe the drive for energy security will increase inflation and hurt growth in the short term. Greater supply of U.S. and other non-Russian fossil fuels will be needed. Further out, this should

Energy supply shock

The lines show the changes in the price of different commodities since July 1, 2021. European natural gas price based on European Energy Derivatives Exchange futures, the U.S. based on MYM-Henry Hub Gas futures price. Oil price based on ICE-Brent crude futures (BlackRock Investment Institute, with data from Refinitiv Datastream, March 2022)

Brent crude oil prices vs. past shocks

U.S. crude oil price drivers

The chart shows the evolution of Brent oil prices over historical episodes of shocks to energy, as defined by Hamilton (2011), 'Historical oil shocks', NBER. Data are monthly and assume that the latest daily price is projected forward for the remainder of the month to calculate the current monthly average (BlackRock Investment Institute, with data from Refinitiv Datastream, March 2022)

European natural gas prices vs. past shocks

Forward-looking estimates may not come to pass. The chart shows the 3-year average annualized inflation rates for headline U.S. PCE inflation (yellow) and core PCE inflation (orange). Future values are derived from Bloomberg consensus forecasts up to Q3 2022, and thereafter from Federal Reserve projections published in the March 2022 FOMC Summary of Economic Projections (BlackRock Investment Institute, U.S. Bureau of Economic Analysis, Bloomberg, Federal Reserve Board, with data from Haver Analytics, March 2022)

U.S. fed funds, market pricing & Fed forecast, 2015-2025

The chart shows the historical fed funds rate, current market pricing in forward overnight index swaps and the Fed's March 2022 projection based on the median dot of policymaker projections. The final green dot represents the Fed's long-term policy rate expectation (BlackRock Investment Institute, with data from Refinitiv Datastream, March 2022)

Comparison of IEA and EU assessments of measures to reduce Russian natural gas usage

The chart shows the estimated contribution various measures can make in reducing EU imports of Russian gas. The left bar shows the IEA assessment released in its 10-Point Plan. The right bar shows the European Commission's assessment under its proposed REPowerEU plan (BlackRock Sustainable Investing, International Energy Agency and European Commission, March 2022)

Energy burden as a share of GDP, 1970-2022

The chart shows the cost of oil, gas and coal consumption in the European Union and U.S. as a share of GDP. We use regional energy prices and divide by GDP in U.S. dollars. Data for 2022 are based on IMF's latest GDP forecasts and the year-to-date average of daily commodities prices (BlackRock Investment Institute and BP Statistical Review of World Energy 2021, with data from Haver Analytics, March 2022)

Global and clean energy equities total return, 2022

Past performance is no guarantee of future results. The chart shows the total return index for the MSCI World Energy Index, MSCI World Equity Index and S&P Global Clean Energy Index rebased to 100 at the start of January 2022 (BlackRock Investment Institute, with data from Refinitiv Datastream, March 2022)

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