About the author: Samantha Cross He is also the Director of Energy Safety and Climate Initiatives at Brookings.
After the oil crisis of the late 1970s, we did not see the potential for such a breakdown in energy markets. Russia’s terrible occupation of Ukraine has made the country and its leader Vladimir Putin international rivals. But Russia is a powerhouse in the international energy market, producing 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. However, this crisis did not recur in the 1970s.
This energy crisis is different from what came before in many important ways. In the past, energy producers used the oil supply as a weapon to punish consumers with political differences. At the moment, consumers are reducing their energy purchases to punish Russia for its aggressive and barbaric behavior in Ukraine. So far, direct restrictions on energy trade have been minimal. The United States has banned all Russia’s energy imports, but Europe has not. That move was easy for the United States because it only imported a small amount of Russian oil. Fees for energy products are also exempt from most banking restrictions.
Nevertheless, the situation in Russia is shaking global oil markets. Approximately 2 to 3 million barrels a day, or 2% to 3% of global oil supplies, are not on the market today, with buyers worried about violating other barriers, renting tankers to carry oil and risking the reputation of accepting Russian oil. Some Russian oil reaches the market in “dark” ways, including ships shutting down transponders to cover their source. China and India buy more Russian oil and are selling at a discount despite today’s world oil prices. Even without the full range of oil sanctions, the price of benchmark crude oil has been over $ 100 a barrel since the early days of the occupation.
Another major difference from the past is that the natural gas trade has become global and is part of today’s energy crisis. Liquefied natural gas now accounts for 39% of total international gas exports. LNG’s cargo can be shipped worldwide, freeing the gas trade from the constraints of standard piping systems. On the one hand, it allows the buyer the flexibility to obtain natural gas from different suppliers, as long as they have the required LNG infrastructure. On the other hand, disruptions to gas supply can now spread worldwide, much like the oil disruptions we have seen in the past.
Europe is at the center of Russia’s natural gas crisis. Russia generally supplies about a third of Europe’s gas. Even before the invasion of Ukraine, Russia fulfilled its contractual obligations and significantly reduced the supply of natural gas to Europe, but did not provide additional gas. As a result of these and other factors, total European natural gas prices increased to the equivalent of $ 59 million Btu (Dutch title transfer facility) in late December 2021, slightly less than $ 4 per MMBtu in the United States. Day (Henry Hubble). European natural gas prices have risen to $ 37 per MMBtu in recent days, to $ 75 per MMBtu since the invasion. These prices are high enough to attract LNG from all over the world, with tankers heading to Asia actually making their way back to Europe. In this way, the high prices in Europe have become the high prices in Asia, an event that did not happen before the LNG era.
Now Europe and Russia are playing chicken game with gas supply. Russia is demanding that buyers from “unfriendly” countries pay or be cut off for their energy products in Russian rubles. The move is aimed at stifling the ruble and undermining sanctions on Russia’s central bank. However, this change would break the terms of existing gas agreements with European buyers, which are denominated in euros or US dollars. European customers, with the exception of Hungary, refuse to comply. At the same time, the European Union has announced plans to reduce Russian gas use by two-thirds this year and gradually reduce it “before 2030”.
There is one more important difference between this energy crisis and the past years. The Russian crisis is taking place in the context of the transition to green energy. Most countries participating in the Russian embargo are committed to achieving net zero greenhouse gas emissions by the middle of the century. As the world moves toward net zero, economies that rely on fossil fuel revenues face an account. Russia falls into this category. In 2019 (pre-epidemic), oil and gas accounted for 39% of federal budget revenues and 60% of exports. These revenues will not disappear overnight, but Russia’s recent activities are focusing on the significant consumer outflow of all fossil fuels, especially Russian fuels.
Russia will have little time to adapt to the biggest changes in its most important industry, except to do great harm to the Russian economy, which will create severe sanctions. Although the world is feeling the pain of Russia’s declining energy supply, it is affecting Russia more than it hurts us.
Guest comments like this were written by the authors outside the Barnes and Marketwatch newsroom. They reflect the views and opinions of the authors. Submit comment proposals and other comments to firstname.lastname@example.org.