Energy: The Last Frontier Of The Ukraine War

The Ukraine war has intensified the old energy conflict between Russia and the US.  The ultimate result of this struggle is uncertain but US main allies, i.e., Europe, are not expected to perform well.

Fossil fuels are the main sources of world energy providing 80% of the world’s consumption.  In Europe, and despite long-dated political, social and media initiatives in favour of green energy, in 2021 fossil fuels sourced 70.6% of total energy consumption and renewables only 12.3%, the latter an unremarkable feat as green promotion started in the late 1970s.  Historically Europe has relied on Russian fuels and as of May 2022 Russian oil imports represented 23.7% and 16.1% of OECD Europe’s oil demand and total imports, respectively, whereas in 2021 Russian gas equalled 71.7% of Europe’s total gas pipeline imports and 49% of total gas imports, respectively.

The balance of power in the world energy markets has changed in the last decades to the West’s detriment.  In 2021, the BRICS (Brazil, Russia, India, China, and South Africa) energy production was 37.9% of the world’s total against 21.6% by the G7 and 4% by the European Union (EU), and the BRICS energy consumption was 40.1% of the world’s total against 25% by the G7 and 9.4% by the EU.  Meanwhile, the energy weight of the US and Russia is backed by both having the world’s highest levels of fossil fuel reserves – each about 14% of world’s total in 2020 – and producing 15.9% and 11.8% of the world’s total energy, respectively.

In the US there is an old symbiotic relationship between government policy and its oil multinationals with geopolitical gains and corporate profits going hand in hand.  After the 2nd oil shock of 1979, the Carter Administration laid out an energy policy that allegedly set the stage of US modern geopolitical initiatives.   The US-led interventions in Kosovo, Afghanistan, Iraq, Kuwait, Libya, and Syria were ultimately aimed at securing the Eurasian energy space for the US.  “Global War on Terror”, “Assad Must Go” and “Rules-based International Order” are euphemisms for US policies directed at geopolitical hegemony through the control of energy sources and transportation routes.

A liquefied natural gas terminal in Texas

US natural gas is a late comer in this conflict.  In 2000 US gas exports were only 1.2% of the world’s total but by 2021 they have reached 17.5% and have become Europe’s main source of LNG imports representing 28.5% of total.  US increasing denunciations against the impact of Russian gas on Europe’s security coincided with the growing potential of US natural gas to compete and displace Russia.

The Ukraine conflict has turned the table on these struggles. For the US, the war is an opportunity to end Europe’s energy dependence on Russia, destroy the old Russo-German economic partnership based on cheap Russian energy and enable further European reliance on “the US energy platform”.  Sanctions purportedly destined to cripple Russian energy exports and stop its war machine financing have also sought to destabilize and induce regime change in the Kremlin.

Europe, deprived of fossil fuel reserves except coal,  has blindly followed US policies and is suffering a vicious circle of energy supply disruptions, severe increases in energy prices with direct impact on population’s welfare, decreasing industrial competitiveness leading to business closures and job losses and deterioration of financial conditions.   European politicians are realizing that US gas is sold in Europe at prices 4 times higher than domestically. The UK Prime Minister just became the first casualty of misguided economic policies intended to control rising energy bills.  Europe appears paralyzed in its own ambivalences and contradictions on energy policy, including big business versus the green agenda and the future role of nuclear energy and coal.

Nord Stream Germany
installations of the natural gas pipeline ‘Nord Stream’ in Lubmin, Germany

Russia, meanwhile, just showed a Jan-Sep 2022 current account surplus of US$ 198.4bn which is 2.6 times larger than in 2021.  Japan, with Russian fossils sourcing 7.1% of its energy needs, has conveniently been exempted from a planned Russian oil price cap.  Russia is quickly pursuing alternative markets for its energy stocks, with China and India growing as buyers for their own use and intermediaries to third countries.

Europe’s weak market position could neutralize the impact of energy sanctions on Russia as the latter will likely circumvent the West’s planned oil price cap through alternative shipping and insurance arrangements. Moreover, Russia has unleashed several initiatives to expand and strengthen energy-linked political-economic partnerships, like a planned Turkey gas hub that could become a major energy crossroad potentially enabling Europe to access again Russian gas mixed with Central Asian sources.

The OPEC+ decision to reduce oil production has been justified by the need to preserve market stability but is also a response to the attempted Russian oil price cap which is perceived as a dangerous precedent.  The US is considering using old antitrust legislation to lift sovereign immunity and allow suing oil producing nations in US courts on market manipulation grounds.   Targeting OPEC+ states could further destroy US credibility and lead affected governments to protect themselves, for instance through divestures from US financial holdings currently at over US$ 200 billion.

Gas tanker
The tanker Sun Arrows loads its cargo of liquefied natural gas from the Sakhalin-2 project in the port of Prigorodnoye, Russia, Octeber 2021

The Biden Administration is also using oil to support its short-term agenda.  The US Strategic Petroleum Reserve, an emergency stockpile created in 1973 to counter severe supply interruptions has been brought down to early1980s levels in a perceived effort to control domestic gas prices and have a happy electorate ahead of the coming mid-term vote.

The explosions at the Nord Stream gas pipelines have risen energy warfare to an unseen level as they have taken away from Germany an energy supply alternative,  severely weakened a diplomatic option for the Ukraine war and enable further European reliance on US gas.  Suspicions that the US is the main beneficiary of these events will only increase apprehension and ultimately damage whatever trust still exist on US good intentions towards Europe.  Sadly, this episode will not be the last escalation step on the energy theatre as the Ukraine war continues.

Reposts are welcomed with the reference to ORIENTAL REVIEW.
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