About the author: Samantha Gross is the director of the Energy Security and Climate Initiative at Brookings Institution.
Not since the oil crises of the late 1970s have we seen the potential for so much disruption in energy markets. Russia’s appalling invasion of Ukraine has made the country and its leader, Vladimir Putin, international pariahs. But Russia is a powerhouse on international energy markets, producing about 14% of the world’s oil and nearly 17% of the world’s natural gas. Russia is also an important exporter of coal to its neighbors in Asia and Europe. Still, this crisis isn’t 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 which they had political differences. This time, consumers are curtailing their energy purchases to punish Russia for its aggressive and barbaric behavior in Ukraine. Thus far, direct sanctions on energy trade are very limited. The U.S. has prohibited all Russian energy imports, while Europe has not. That step is easier for the U.S., since it imported only a small amount of Russian oil. Payments for energy products are also excluded from most banking sanctions.
Nonetheless, the situation in Russia is roiling global oil markets. Approximately 2 to 3 million barrels per day, or 2% to 3% of global oil supply, are off the market today, owing to buyers’ concern about running afoul of other sanctions, the expense of hiring tankers to move the oil, and the reputational risk of accepting Russian oil. Some Russian oil is reaching the market through “dark” means, including ships turning off their transponders to hide their origin. China and India are also purchasing more Russian oil, sold at a discount despite today’s high global oil prices. Even without a full array of oil sanctions, benchmark crude oil prices have stayed over $100 per barrel since the early days of the invasion.
Another key difference from the past is that natural gas trade has gone global and is a part of today’s energy crisis. Liquified natural gas now makes up 39% of total international gas shipments. Cargoes of LNG can be shipped around the world, liberating gas trade from the constraints of fixed pipeline systems. On the one hand, this allows buyers flexibility to obtain natural gas from different suppliers, so long as they have the necessary LNG infrastructure. On the other hand, disruptions in gas supply can now spread globally, much like the oil disruptions we’ve seen in the past.
Europe is at the epicenter of the Russian natural gas crisis. Russia generally provides about one-third of Europe’s total gas supply. Even before its invasion of Ukraine, Russia significantly reduced its supply of natural gas to Europe, meeting its contract obligations but providing no additional gas. As a result of this and other factors, wholesale European natural gas prices spiked to the equivalent of $59 per million Btu (at the Dutch Title Transfer Facility) in late December 2021, compared to slightly less than $4 per MMBtu in the U.S. on the same day (at Henry Hub). European natural gas prices rose to as much as $75 per MMBtu after the invasion before settling around $37 per MMBtu in recent days. These prices have been high enough to attract LNG from all over the world, with tankers on their way to Asia literally turning around to head to Europe instead. In this way, Europe’s high prices have become Asia’s high prices as well, a phenomenon that did not happen before the LNG era.
Now Europe and Russia are playing a game of chicken with gas supply. Russia is demanding that buyers from “unfriendly” countries pay for their energy products in Russian rubles or be cut off. This action is intended to prop up the ruble and undermine sanctions on Russia’s central bank. However, this change would break the terms of existing gas contracts with European buyers, which are denominated in euros or U.S. dollars. European customers, with the exception of Hungary, are refusing to comply. At the same time, the European Union has released a plan to cut Russian gas use by two-thirds this year and phase it out “well before 2030.”
There is one more important difference between this energy crisis and those of years past. The Russian crisis is taking place against the backdrop of the green energy transition. Most countries participating in the Russian sanctions have committed to achieve net zero greenhouse gas emissions by mid-century. As the world moves toward net zero, economies that rely on fossil fuel revenue face a reckoning. Russia falls squarely into this category. In 2019 (pre-pandemic), oil and gas provided 39% of federal budget revenue and made up 60% of exports. These revenues will not vanish overnight, but Russia’s recent actions mean that important consumers are focusing on phasing out Russian fuels specifically, in advance of the longer-term phase out of all fossil fuels.
In addition to the great harm to the Russian economy that the sweeping sanctions create, Russia will have less time to adapt to huge changes in its most important industry. Despite the pain felt around the world due to diminished Russian energy supply, it hurts Russia more than it hurts us.
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COMMENTARY By Samantha Gross April 11, 2022 4:00 am ET