About the author: Samantha Gross is Director of the Energy Security and Climate Initiative at the Brookings Institution.
Not since the oil crises of the late 1970s have we seen the potential for so much disruption in the energy markets. Russia’s shocking invasion of Ukraine has made the country and its leader, Vladimir Putin, international pariahs. But Russia is a powerhouse in international energy markets, producing about 14% of the world’s oil and almost 17% of the world’s natural gas. Russia is also a major exporter of coal to its neighbors in Asia and Europe. Yet this crisis is not just a repeat of the 1970s.
This energy crisis is different from those that came before in several important ways. In the past, energy producers used oil supply as a weapon to punish consumers with whom they had political disagreements. This time, consumers are curtailing their energy purchases to punish Russia for its aggressive and barbaric behavior in Ukraine. So far, direct sanctions against energy trade are very limited. The United States has banned all Russian energy imports, while Europe has not. That move is easier for the United States, as it only imported a small amount of Russian oil. Payments for energy products are also excluded from most bank sanctions.
Nevertheless, the situation in Russia is furious in the global oil markets. About 2 to 3 million barrels a day, or 2% to 3% of the global oil supply, are out of the market today due to buyers’ concerns about conflicting with other sanctions, the cost of renting tankers to move the oil, and reputation risk by accepting Russian oil. Some Russian oil reaches the market through “dark” means, including ships that turn off their transponders to hide their origins. China and India are also buying more Russian oil, which is being sold at a discount despite today’s high global oil prices. Even without a full range of oil sanctions, benchmark crude oil prices have remained above $ 100 a barrel since the early days of the invasion.
Another important difference from the past is that trade in natural gas has become global and is part of today’s energy crisis. Liquefied natural gas now accounts for 39% of total international gas shipments. Charges of LNG can be shipped around the world, freeing gas trade from the constraints of fixed pipeline systems. On the one hand, this gives buyers the flexibility to get natural gas from different suppliers as long as they have the necessary LNG infrastructure. On the other hand, disruptions in the gas supply can now spread globally, just like the oil disruptions we have previously seen.
Europe is at the epicenter of the Russian natural gas crisis. Russia generally accounts for about a third of Europe’s total gas supply. Even before its invasion of Ukraine, Russia significantly reduced its supply of natural gas to Europe, fulfilling its contractual obligations but supplying no additional gas. As a result of this and other factors, wholesale prices for European natural gas rose to the equivalent of $ 59 per tonne. million Btu (at the Dutch title transfer facility) at the end of December 2021, compared to a little less than $ 4 per million. MMBtu in the United States at the same time. day (at Henry Hub). European natural gas prices rose to as much as $ 75 per MMBtu after the invasion, before falling to around $ 37 per MMBtu in recent days. These prices have been high enough to attract LNG from all over the world, with tankers en route to Asia literally turning around to head to Europe instead. In this way, Europe’s high prices have also become Asia’s high prices, a phenomenon that did not happen before the LNG era.
Now Europe and Russia are playing a game of chicken with gas supply. Russia demands that buyers from “unfriendly” countries pay for their energy products in Russian rubles or be cut off. This action is intended to support the ruble and undermine sanctions against Russia’s central bank. However, this change would violate the terms of existing gas contracts with European buyers denominated in euros or US dollars. European customers, with the exception of Hungary, refuse to comply. At the same time, the EU has released a plan to reduce Russian gas consumption by two-thirds this year and phase it out “well before 2030.”
There is another important difference between this energy crisis and previous years. The Russian crisis is taking place against the background of the green energy transition. Most countries participating in the Russian sanctions have committed to achieving net zero greenhouse gas emissions by the middle of the century. As the world moves toward net zero, fossil fuel – dependent economies are facing a bill. Russia falls completely into this category. In 2019 (pre-pandemic), oil and gas accounted for 39% of federal budget revenue and accounted for 60% of exports. These revenues will not disappear overnight, but Russia’s recent actions mean that key consumers are focusing on phasing out Russian fuel specifically, ahead of the long-term phasing out of all fossil fuels.
In addition to the great damage to the Russian economy caused by the extensive sanctions, Russia will have less time to adapt to major changes in its main industry. Despite the pain felt around the world due to the diminished Russian energy supply, it hurts Russia more than it hurts us.
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