This note addresses the issue of higher energy prices impact on Ukrainian economy. It concentrates on oil and natural gas prices, but notes how those prices relate to the price of other energy sources in Ukraine, as well as to measures of inflation.

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Natural gas and oil products constituted 60% of final energy consumption in 2002, with natural gas accounting for over 43% of total needs. The vast majority of the domestic supplies of oil and gas are imported in Ukraine. The structure of energy consumption reveals that a natural gas price increase would directly and most heavily affect industrial production and households, while the direct effect of oil price increases will be the most noticeable in transport and agriculture.

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Relative prices of energy sources are not stable in Ukraine. Factors determining prices in Ukraine are especially complex, and while market forces are at play, they work in ways that are not obvious. Recently, gas prices have been heavily influenced by politics and leverage.

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Ukraine is very vulnerable to gas and oil price increases because it is the most energy-intensive country in the region. The challenges for policy are to understand what factors determine oil and gas dependency and energy intensity.

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Estimates of the direct impact of oil and gas price increases on Ukraine can provide great insight into structural and macroeconomic difficulties Ukraine faces over the next few years. A simple net import model is used here to determine the estimates.

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Ukraine has several options for decreasing its vulnerability to oil and gas price increases, including seeking gradual reductions in gas price increases from suppliers and adopting a strategic plan for restructuring the energy sector.

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