Written by 10:04 am Europe Economy

Energy Poverty – Modern Diplomacy

Background

Russia and Ukraine are major players in the global energy markets, in fact Russia is one of the world’s top three crude oil producers. It is the second largest producer of natural gas in the world with largest gas reserves, making it the largest gas and oil exporter as well. Hence, Russia’s unprovoked invasion of Ukraine has disrupted the global energy situation which was already volatile due to post-lockdown energy demand exceeding supply.[1] Oil and gas prices have reached their highest levels in almost a decade as a result of this geopolitical turmoil, prompting several nations to reevaluate their energy supply and policies. The impact was greatest between December 2021 and June 2022 as energy costs increased by 58.3%. Since the invasion, oil and gas were continued to be transported from Russia to Europe, even through the pipelines that cross Ukraine.[2] This energy crisis has significantly benefitted Russia and other oil and gas producing states.

This essay endeavors to analyze the impact of this geopolitical conflict on global energy security, followed by a brief overview on how the concerned countries are moving away from their dependence on Russia. In the end, it shall also cover some future possibilities, recommendations, and its implications towards the clean energy goals.

The European Union, United States and other parties have imposed economic sanctions on Russia, along with their plans to gradually wean themselves off of Russia’s fossil fuels. However, despite the fact that Russia is bombarding Ukraine with bombs, its gas and oil are still being exported to Western countries that have denounced the invasion.

Impact on Europe

The European Union imports 90% of its natural gas needs, 41% of which originates from Russia. The EU also imports 46% of its coal and 27% of its oil from Russia. Since the start of the war in Ukraine, the supply of Russian oil and gas entering Europe has risen sharply. In March alone, Europe sent over €22 billion (US$24 billion) to Russia for oil and gas.[3] Since the beginning of April, Russia’s imports have costed Europe at least €1 billion daily. Physical gas supplies were only cut off in late June as a result of Russia’s decision to reject supplies to nations like Finland, which has asked for NATO membership, and to Bulgaria and Poland, both of which refuse to pay in Roubles.

In each of these cases, the little supplies that were depleted were rapidly restored. But on July 11, Russia also shut down the important NordStream 1 pipeline for scheduled repair, potentially cutting off Germany’s supply by as much as 60%. If Russia chooses not to revive the pipeline, it will be more challenging to replace those supplies. Berlin’s government has accelerated the execution of the next stage of its emergency response plan due to the risk. But as nations put their plans into action to diversify their energy supplies and lessen the influx of Russian oil and gas, things may alter in the upcoming months. By the end of the year, Poland, for instance, will stop importing any Russian coal, gas, or oil, while Austria and Germany are building the framework for gas rationing. Germany, which imports more than one-third of its oil and more than half of its natural gas and coal, is one country where the energy problem is particularly severe.

Germany’s immediate issue is to lessen its dependence on natural gas in the electricity generation sector, a task made more difficult by the nation’s decision to abandon nuclear energy, as its final three nuclear power plants are set to shut down this year. Following February 24, price hikes of 60% for oil and a startling 400% for natural gas have been seen in Europe over the previous year because of the anticipation that western economic sanctions and Russian reprisal would restrict trade and ignite a fierce competition for existing supplies.[4] Oil supplies can still be managed because Russian crude oil shipments can still reach receptive customers in Asia and Africa, but manipulating the natural gas market is more difficult because it is dependent on specific infrastructure like liquefaction plants and pipelines. Putin is keen to take advantage of the geopolitical weakness that Europe’s energy security challenge presents.

Impact on United States

The US imports very little energy from Russia and is a net exporter of fossil fuels. Therefore, the US’s decision to restrict energy imports from Russia has no effect on the country’s energy security.[5]

Disruption of Supply Chain

The immediate disruption of the logistical supply chains of oil and gas to Europe as a result of the damage of infrastructure in both Russia and Ukraine is more significant than in Russia.[6] The energy supply has been disrupted by Russia’s siege of Ukraine’s largest cities, bombardment of the Zaporizhzhya nuclear power plant, and intentional destruction of vital assets. Following the battle, shipping products in the Black Sea region has greatly increased in difficulty and cost, particularly as a result of the shutdown of all Ukrainian ports.

Impact on other Global Players

Given that the majority of the world’s energy needs—nearly 50% in 2022—will be met by oil and gas, the supply gap poses a challenge to the international community. [7]Oil, gas, and other fossil fuel prices have increased at a never-before-seen rate as a result of the war’s interruption of the energy supply. As of July 5, 2022, the cost of a barrel of oil in the OPEC has risen to US$114.3. Also rising from US$ 2.55 in January 2022 to US$ 3.27 in July 2022 was the price of gas globally.[8] Energy costs are a significant factor to the cost-of-living crisis and inflation, and the economic downturn since consumers in Europe and other countries are paying more as worldwide prices have increased.

Alternatives to reduce the dependence on Russia

To negotiate the necessary purchases, the European Commission established a single buyer mechanism and reached an agreement with the US to import 15 bcm from the US daily. Germany abandoned its approval of a recently constructed gas pipeline from Russia on February 22 and is instead preparing to import liquefied natural gas from nations like Qatar and the United States. While Italy, the Netherlands, and the UK are all stepping up their efforts to construct wind power, Belgium is reconsidering its decision to abandon nuclear power.

By 2027, the EU has promised to stop importing gas from Russia. To achieve this goal, the EU can either expand pipeline imports from non-Russian gas suppliers like Azerbaijan or restart certain coal power plants. The latter would indicate that ‘Fit for 55”s goals of achieving net zero would temporarily be postponed.[9] The production of fertilizer plants across Europe has been reported to be reduced, and 31 nations have consented to release oil from respective strategic reserves.

By increasing efficiency, some gas can be avoided, while other gas can be replaced by increasing the production of renewable energy. However, even taking into account these options to replace supply and lessen demand, there will still be a sizable difference between the two. The present market worries stem from this. The IEA has been keeping an eye on the effects of Russia’s invasion of Ukraine on the world energy markets ever since the conflict began. In order to ease market pressure and send a clear message that there won’t be a shortage of supplies as a result of Russia’s invasion, member nations of the International Energy Agency (IEA) have agreed to take the extraordinary step of releasing oil from their emergency reserves on two separate occasions.[10] One of the releases, which also included more barrels from the United States Strategic Petroleum Reserve, was the biggest stock release in IEA history.

Effects on the Global Economy and Geopolitical Environment

Inflation: After a decade of extremely low inflation, the annual inflation rate in the 27 EU member states reached 9.8 percent in July, the highest level in the previous 25 years. Wholesale gas prices were approximately 200% higher before the invasion of Ukraine; benchmark gas prices are currently trading at over €250 per MWh and reached a peak of over €340 per MWh in July, more than 10 times higher than a year ago. [11]Similar patterns in wholesale electricity pricing had been seen.

Recession and the impact on forex: After Russia stopped supplying gas through its main pipeline to Europe, the euro fell to a 20-year low below USD 0.99. An economy already dealing with a rise in inflation risks suffering more harm due to the euro’s weakening against the US dollar.

Financial repercussions and potential reputational consequences: Western businesses are under increasing pressure to sever their ties with Russia. Following the invasion of Ukraine, a number of businesses made a variety of declarations about ending contracts and divesting. For these businesses, the financial effects are significant.

Higher shipping costs: The cost of transporting crude from Russia is rising as a result of sanctions placed on the nation, which increase the hazards associated with moving cargo along such routes. Meanwhile, the cost of other passages is rising as a result of a rush to find substitute sources.

Changes in energy policy, including the growth of renewable energy sources and the energy mix: Especially in those nations that are strongly dependent on Russia, where a new strategy is required, the current energy crisis is quickening the energy transition and necessitating additional investment in renewables. By the end of 2022 and to zero by the end of 2030, the EU has set a goal to reduce its gas imports by two-thirds through REPower EU.[12]

Opportunities for other countries

Energy exports from Russia appear to be shifting to the East and South, two regions with expanding economies. If the price is right, this energy swing might benefit China and India. Gas reserves have been found from the Eastern Mediterranean to Central Asia, but it will take years to develop them and the infrastructure needed to commercialize them.[13] 

Way forward

A geopolitical event as significant as the conflict between Russia and Ukraine has had an indirect and direct impact on the world’s energy security situation, particularly in the shifting dynamics of the energy supply and pricing due to market volatility.

  • Although the conflict in the Ukraine will likely hasten Europe’s shift from fossil fuels, it may also slow the world’s transition to clean energy and increase greenhouse gas emissions in Southeast Asia and Russia, in particular. Consequently, a fundamental fix via a full global switch to net zero is likely to remain difficult.
  • It is anticipated that, within a year, practically all European nations will have stopped purchasing the majority of their oil from Russia and find substitute sources in the Middle East and elsewhere.
  • The cartel of oil exporters, OPEC, rather than Russia, would determine the price they must pay. The Saudis and others would be tempted to restrict production in order to maintain prices above $100 per barrel, and this temptation will only be lessened if the US shale industry can generate a fresh boom in supplies.[14]
  • Bilateral and possibly multilateral agreements are expected to replace self-sufficient aspirations on the energy security agenda. These will include not simply lengthy supply agreements between businesses, but also perhaps deeper ties in politics, trade, and security.
  • Additional gas developments will most likely be under development all around the world, even in politically sensitive locations like the waters off the coasts of Israel and Lebanon.
  • Energy insecurity challenges will influence economic and political connections in Europe and around the world, fostering new alliances while also igniting fresh tensions and conflicts.
  • The invasion by Russia has temporarily increased costs, but it may also herald a longer-term trend toward sustainability.
  • Since the subsidies are short-term and unsustainable, the countries who used them to protect their domestic energy markets from the war’s shock may actually make things worse in the future.

The necessity for nations to achieve energy independence while protecting the environment makes the path to achieving global energy security a double-edged sword. In order to lessen Europe’s dependency on Russian energy imports, the International Energy Agency offers a number of recommendations. These recommendations can be used by other nations as well to ensure their own energy security. They include speeding up solar and wind energy projects, making the most of nuclear and bioenergy, and stepping up efforts to decarbonize energy sources. The crisis has highlighted the urgent need for nations to expand the supply of renewable energy and create alternative sustainable energy sources. The effects of Russia’s attack on Ukraine will take time to manifest; the only reliable prediction for the future is uncertainty and increased price volatility.


[1] @cer_eu. “The Impact of the Ukraine War on Global Energy Markets | Centre for European Reform.” The Impact of the Ukraine War on Global Energy Markets, 28 Sept. 2022, www.cer.eu/insights/impact-ukraine-war-global-energy-markets#:~:text=Oil%20and%20gas%20have%20continued,other%20oil%20and%20gas%20producers.

[2] “Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA.” Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA, 16 Aug. 2022, kippra.or.ke/russia-ukraine-conflict-and-its-effects-on-global-energy-security.

[3] “What the War in Ukraine Means for Energy, Climate and Food.” What the War in Ukraine Means for Energy, Climate and Food, 5 Apr. 2022, www.nature.com/articles/d41586-022-00969-9.

[4] “What the War in Ukraine Means for Energy, Climate and Food.” What the War in Ukraine Means for Energy, Climate and Food, 5 Apr. 2022, www.nature.com/articles/d41586-022-00969-9.

[5] “How The Russia/Ukraine Crisis Impacts Energy Industry?” KPMG, home.kpmg/fr/fr/blogs/home/posts/2022/03/how-the-russia-ukraine-crisis-impacts-energy-industry.html. Accessed 9 Oct. 2022.

[6] “Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA.” Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA, 16 Aug. 2022, kippra.or.ke/russia-ukraine-conflict-and-its-effects-on-global-energy-security.

[7] “Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA.” Russia-Ukraine Conflict and Its Effects on Global Energy Security &Ndash; KIPPRA, 16 Aug. 2022, kippra.or.ke/russia-ukraine-conflict-and-its-effects-on-global-energy-security.

[8] @cer_eu. “The Impact of the Ukraine War on Global Energy Markets | Centre for European Reform.” The Impact of the Ukraine War on Global Energy Markets, 28 Sept. 2022, www.cer.eu/insights/impact-ukraine-war-global-energy-markets#:~:text=Oil%20and%20gas%20have%20continued,other%20oil%20and%20gas%20producers.

[9] “What the War in Ukraine Means for Energy, Climate and Food.” What the War in Ukraine Means for Energy, Climate and Food, 5 Apr. 2022, www.nature.com/articles/d41586-022-00969-9.

[10] “Russia’s War on Ukraine – Topics – IEA.” Russia’s War on Ukraine – Topics – IEA, 1 Mar. 2022, www.iea.org/topics/russia-s-war-on-ukraine.

[11] “How The Russia/Ukraine Crisis Impacts Energy Industry?” KPMG, home.kpmg/fr/fr/blogs/home/posts/2022/03/how-the-russia-ukraine-crisis-impacts-energy-industry.html. Accessed 9 Oct. 2022.

[12] “How The Russia/Ukraine Crisis Impacts Energy Industry?” KPMG, home.kpmg/fr/fr/blogs/home/posts/2022/03/how-the-russia-ukraine-crisis-impacts-energy-industry.html. Accessed 9 Oct. 2022.

[13] Nevitt, Mark, et al. “Climate Security, Energy Security, and the Russia-Ukraine War.” Just Security, 11 May 2022, www.justsecurity.org/81440/climate-security-energy-security-and-the-russia-ukraine-war.

[14] “What the War in Ukraine Means for Energy, Climate and Food.” What the War in Ukraine Means for Energy, Climate and Food, 5 Apr. 2022, www.nature.com/articles/d41586-022-00969-9.

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