The Russian-Ukrainian crisis not only changed the geopolitical landscape, but also profoundly altered the global energy balance.

Since the escalation of the conflict between Russia and Ukraine, geopolitical risks have spurred a sharp rise in international oil prices. From February 21, 2022, when Russia recognized two breakaway regions in eastern Ukraine as independent entities until March 2, the price of Brent crude oil rose 17.6% from 97 $.38 to $114.5; the price of WTI crude oil rose 20% from $92.8 to $111.38. On March 2, the price of gas at the Dutch hub TTF, the benchmark gas price for Europe, reached an all-time high at over 194 euros per megawatt hour, or over 2,000 euros per 1,000 cubic meters of gas .

A substantial increase in oil prices would increase industrial and consumer spending, thereby increasing the possibility of global inflation, which will impact the global economy. For large oil and gas importers, rising oil prices will force them to bear much more. European countries, China, Japan, etc. that import large quantities of oil and natural gas are likely to be the hardest hit countries by the oil and gas price spike. Since December 31, 2021, refined oil prices in China have seen “five consecutive increases” (including March 3), with gasoline rising 1,265 yuan per ton and diesel 1,220 yuan per ton. On March 3, Japanese Prime Minister Fumio Kishida said that in order to minimize the negative impact of soaring energy prices on the Japanese economy, the country would make a greater commitment to saving energy and would strive to reduce the use of oil and natural gas as much as possible. possible.

Figure: Brent crude oil prices have continued to rise since the second half of last year.

Source: SINA finance

The substantial jump in world oil prices is attributable to the increase in the risk premium caused by the Russian-Ukrainian dispute. However, it should be noted that unlike in the past, the dramatic changes in the global geopolitical landscape triggered by the Russian-Ukrainian crisis have caused a profound cascading impact on the global energy market and energy industry landscape. As a result. this structural impact is causing a major change in the global energy market.

The energy supply and demand systems of Europe and Russia will suffer a severe blow. In 2021, Russia’s crude oil production was around 520 million tons, ranking third in the world, after the United States and Saudi Arabia; natural gas production of 761 billion cubic meters, second in the world, accounting for about 18% of the world’s total natural gas production, second only to the United States. In 2021, Russia exported about 230 million tons of oil, ranking second in the world after Saudi Arabia, and about 200 billion cubic meters of natural gas, ranking first in the world. 80% of Russian natural gas exports are destined for Europe. In 2020, about 30% of Europe’s natural gas was supplied by Russia, whose Russian supply accounted for more than 38% of the total gas of the 27 member states of the European Union. In terms of countries, the Czech Republic, Latvia, Moldova and Hungary obtain more than 95% of their domestic gas supply from Russia; Finland and Germany over 65%, Poland over 50%; Romania, Italy and Greece around 40%; the Netherlands around 26%; France, Sweden and Spain more than 10%. Although Western countries do not currently include Russian energy exports in their sanctions, the existing sanctions will sooner or later undermine Russia’s energy relations with Europe.

Geopolitical factors have also prompted the massive withdrawal of international capital from the Russian energy industry. Following the escalation of the Russian-Ukrainian crisis, the sanctions of Western countries led a large amount of European and American capital to leave the Russian energy sectors. To date, nine multinational oil companies have either announced their withdrawal from Russian-related oil and gas cooperation projects or expressed concerns about the Ukraine crisis. Among the oil companies that have announced their withdrawal are British Petroleum (BP), Norwegian National Oil Company (Equinor), Shell, ExxonMobil and Spain’s Repsol. According to incomplete statistics from public disclosure, the value of the assets and related income that the aforementioned multinational oil companies have made in Russia amounts to at least $34 billion. In addition, the Norwegian government has also asked its sovereign wealth fund to exit Russia. It is worth highlighting the investments of many European energy companies in Russia which began after the collapse of the Soviet Union and lasted up to 30 years.

Due to geopolitical and supply-demand ties, Europe has a long history of energy cooperation with Russia and its determination to expand its ties with Europe has increased the Russian-European energy partnership. As the Russian-Ukrainian situation worsens, the long-standing energy cooperation between the two countries will be shattered. Temporarily, direct sanctions measures by the United States and Europe against Russia do not include energy sanctions (due to the large demand for Russian energy), but energy sanctions could arise at any time. In particular, the Nord Stream 2 gas pipeline project between Russia and Germany has been suspended. The management company Nord Stream 2 has filed for bankruptcy. It is not difficult to destroy an energy partnership, but it is not easy to build a stable one. Such “disruptive disturbances” due to political factors will destroy the existing system of energy investment and supply and demand, and it will be difficult to restructure one in a short period of time.

Given the consequences of the Russian-Ukrainian situation, European nations will strive to reform their energy security system. ANBOUND researchers have predicted that the following changes will take place in Europe:

First, look for new sources of energy supply other than Russia. From a European point of view, this is the most important approach to fully guarantee Europe’s energy security. However, European energy demand tells extremely difficult and costly to exclude Russia to build energy security. According to the EU’s Directorate-General for Energy, the world’s largest importer of natural gas in 2021 is the EU, with the largest share of its gas coming from Russia (41%), Norway (24%) and Algeria (11%). We believe that if Europe reduces its access to energy from Russia, one of the biggest beneficiaries will be large US producers.

Second, Europe will restructure its consumption structure, for example by restarting or increasing coal applications and by delaying or eliminating the nuclear phase-out. German Economy and Climate Minister Robert Habeck said the country is considering extending the life of its existing nuclear reactors to protect the country’s energy supply amid uncertainty over gas supplies Russian. After the Fukushima disaster in Japan, Germany announced the closure of all its nuclear power plants by 2022, making it the first industrialized country to abandon nuclear power. Not only nuclear power, but all coal-fired power plants will be shut down by 2038, and natural gas will be phased out by 2050, according to Germany’s plan. In a context of geopolitical crisis, all these highly green and environmentally beneficial initiatives have turned into costly “child’s play”.

Third, the impact of the changing structure of global energy supply on China. Geopolitical upheavals in the global energy supply and demand sector will dampen oil and gas exports from Russia, but increase energy demand for the Middle East, the United States, the Africa and Australia. As the country with the largest energy demand in the world, China will adapt its energy strategy in response to the changing situation. On the one hand, the climate for China to source energy from Russia could improve in the future, while it would tighten China’s energy supply “connection” with Russia; on the other hand, China may face stronger competition when importing energy from other regions or investing in energy. In particular, the future world energy supply will be more linked to geopolitical factors. There would be more “political” interference in international markets.

About The Author

Related Posts