By David Bernell
As the war in Ukraine goes on, with Ukraine’s army thus far stopping the Russian push at Bakhmut, and a Ukrainian offensive expected as more (and more lethal) weaponry is being supplied by members of NATO, one of the issues that held greater salience earlier in the war continues to play a role, though it is less noticed. That is the issue of energy – the extent to which the flow of Russian oil and gas to various consumers, and the flow of money back to Russia, has changed in global energy markets, and how this reflects an evolution in the geopolitics of energy.
There are several significant changes that have taken place. First, the countries of Europe have greatly reduced their purchases of Russian oil and natural gas and their reliance on these sources. This was a major concern from the start. When the US and its NATO allies placed a variety of economic sanctions on Russia at the outset of the war, one area that was not the target of sanctions was the energy sector. Europe had relied so heavily on imports of Russian oil, and especially Russian gas, that there was no way to quickly cut off these supplies without causing major economic havoc in countries importing Russian energy. The very unsatisfying result, in the early months of the war, was that the countries supporting Ukraine were paying for both sides of the war, by sending military and economic aid to Ukraine, and by purchasing Russian energy supplies.
Predictions of Doom Miss the Mark
However, it seems that the predictions of doom – of people in Europe “freezing to death in the dark” – missed the mark. The countries of NATO and the EU managed to cut their oil and gas imports from Russia, provide subsidies for consumers to offset higher energy prices, and secure alternative supplies of energy over time, including not only coal, but also renewable energy from wind and solar power. A warmer winter than usual helped too.
Just prior to the invasion, roughly 30 percent of the EU’s oil imports came from Russia. Today, the EU purchases far less oil from Russia, and the United States is now the largest supplier of oil to the EU. An EU embargo on Russian oil began in December 2022, though one caveat is that Russian oil imports from pipelines can continue, as landlocked countries cannot replace oil sources as easily. Nonetheless, the embargo has now cut off almost 90% of Russian oil sales. (The U.S. began its own embargo of Russian oil in March 2022, but this was not a costly move since the U.S. was getting only three percent of its oil imports from Russia.) In addition, all other petroleum products from Russia have been banned in EU countries as of February 2023. This is significant because imports of
Replacing Russian Gas
With respect to natural gas, the story is similar. Europe was getting 40-45 percent of its gas from Russia before the invasion, with Germany as the largest EU consumer of Russian natural gas. By the fall of 2022 this had fallen to 11 percent, as new supplies have been acquired from Norway Algeria, Qatar, Nigeria and the United States. And even more remarkably, Germany now imports no gas from Russia. This is a significant achievement because it’s generally harder to replace natural gas suppliers than oil suppliers. The reason is that supertankers can store oil easily and ship it anywhere in the world.
Moving natural gas is not as simple. It either has to be sent from the wellhead to its destination directly through a pipeline, which is how the vast majority of natural gas is transported. Or there is a newer way to do things, shipping it as liquefied natural gas (LNG), but this is not yet very widespread. The gas has to be cooled to a temperature of negative 260 degrees Fahrenheit, loaded onto ships via specialized terminals that can keep it cold and liquified, then offloaded onto other specialized terminals and turned into a gas again before sending it to its destination via pipelines.
The EU and the UK have managed to increase their LNG imports by 60 percent in less than a year, and this is a remarkable development, considering that the global market for LNG is in its infancy (or at least early childhood). This shows that nothing focuses the mind and spurs action like a crisis.
Russia Also Adapts
On the other side of the ledger, the Russians have also done reasonably well with respect to their energy exports and revenues. At first, the rapid increase in oil and natural gas prices created a windfall for Russia. But then later prices came back down and stabilized by the end of 2022 to near the price they had been before the invasion. (This was a surprise in itself. Many analysists, including this author, expected oil and natural gas prices to remain at an inflated level for a longer period of time than actually occurred.) The loss of sales to Europe and the loss of windfall profits didn’t diminish revenues too much, as Russia found new markets and buyers, especially in China, India, and Turkey, which were able to purchase oil at below market prices as Russia moved to sell its supplies quickly.
The two figures below tell the story. Russia’s total earnings from energy exports rose right after the invasion, then fell slowly over several months to a point not too far below where they were at the beginning of 2022. A sizable portion of the revenues Russia earned from Europe seem to have largely replaced by those from Asia.
Western Price Caps
The United States and its allies have tried to further limit Russia’s energy earnings, even beyond their own embargos and Russia’s low prices for willing buyers. One way they are doing this is with a price cap on Russian oil exports to other countries. How can they do this? It turns out that a lot of the services that global oil shippers rely on – finance, insurance, brokerage, and navigation – are dominated by Western firms. To that end, these Western firms are not permitted by their governments since December 2022 to provide such services to anyone unless their oil cargoes are priced below the cap, which stands at $60 a barrel, well below the current global market price of $80-85.
The price cap seems to be effective, but things are still working out reasonably well for Russia, which is still earning a lot of money on oil sales, as it is one of the world’s top suppliers. At the same time, the buyers of Russian oil are surely happy to purchase oil at such a low price.
The story with natural gas is worse for Russia. With the large reduction of pipeline sales to Europe, including the cutoff of the Nordstream 1 pipeline in September 2022 and the canceled opening of the Nordstream 2 pipeline (which never shipped a single drop of natural gas to Europe), revenues are down for Russia. And most expect them to continue to fall in 2023.
Energy Markets and Politics are Changing
The upshot is that a lot of the interested parties in this global shift of energy markets and politics are responding in such a way so they can get at least some of what they want and need: Russia is earning oil and gas revenues; Europe is reducing its energy purchases from Russia and doing better than expected in coping with a rapid shift in supplies; and China, India and others are getting plenty of energy at decent prices.
In the longer term, the market for natural gas is becoming increasingly globalized as LNG comes to take up a larger share of global sales. This will make natural gas more like oil over time, so that instead of three big regional markets – Europe, Asia, and North America – dominated by pipelines and highly differential prices (the price of natural gas in European and Asian spot markets was about ten times higher than the price in the U.S. in early 2023), there will be a more globalized market with less regional discrepancy in prices.
It is also the case that the politics of energy are changing. Russia has become a pariah in Europe and North America, and it has lost a generation of economic gains and ties established after the Cold War. Many countries are likely to be replacing Russian oil and gas for good, no longer seeing Russia as a reliable, trustworthy partner. Russia may also lose out on new investment in oil and gas development, and this could further hurt the country economically in the long term. Moreover, it won’t simply be the case that new suppliers of oil and gas will take Russia’s place. Renewable energy is getting a big boost too, especially in Europe and North America, with more consumption and more investment taking place as a result of Russia’s invasion.
Vladmir Putin’s desire for Ukrainian land and obedience is reaping huge whirlwinds in the realm of energy, well beyond the borders of Russia and Ukraine.
About the Author
David Bernell is an Associate Professor of Political Science in the School of Public Policy at Oregon State University. His research and teaching focus on US energy policy, international relations, and US foreign policy. He is the author of the books The Energy Security Dilemma: US Policy and Practice and Constructing US Foreign Policy: The Curious Case of Cuba. Prior to coming to OSU, he served as a political appointee in the Clinton Administration with the US Office of Management and Budget, and with the US Department of the Interior.
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