Energy game

Mel Gurtov
Thursday, Aug 18, 2022

It won’t be long before winter descends on Europe. Before it does, most European countries must address the question of how long and how well they will be able to handle decoupling from Russian energy.

Because of the Ukraine war, oil and natural gas are the chief currencies, which means that energy politics is central to determining the war’s future. Oil and gas finance Putin’s war, constrain Europe’s response to it, and largely determine which side the rest of the world takes.

Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, says: “One of the consequences of this conflict is a fundamental realignment of the global energy system, trading relationships and geopolitical alignments, with China and India more closely aligned with Russia.”

Those two countries are buying about half of Russia’s oil exports, at a whopping 30-percent discount. It’s a great deal for both, enabling Beijing and New Delhi to diversify their sourcing away from the Middle East and bolster their economies with cheap fuel.

At first glance, Russia’s reliance on energy exports, which account for about 40 percent of the country’s revenues, remains firm. Besides China and India, Russia has customers in Africa and other parts of Asia.

Globally, gas and oil imports from Russia have only declined by 15 percent in recent months. That is consistent with the overall international political response to the Russian invasion, in which most countries outside the European Union (EU) and North America have remained on the sidelines, unwilling to criticize Russia openly, usually out of concern about their energy supplies.

Still, some experts believe these alternative customers are not enough to make up for Russia’s European market. In fact, they say, lack of overseas markets is only one facet of the Russian economy that is “imploding.”

A major dilemma for all countries that are sanctioning Russia is that, thanks to rising energy prices, Russia’s income continues to go up even as its deliveries go down. Six of the top ten importers of Russia’s fossil fuels are EU members, and the combined value of all EU-member imports from Russia is roughly $100 billion so far.

For the first 100 days of the Russian invasion of Ukraine, the EU accounted for 61 percent of Russia’s fossil fuel export revenue. That dependence is slowly changing as a number of countries are disconnecting from reliance on Russian fossil fuel exports. The Scandinavian countries and the Baltic states are moving swiftly to disconnect, while Germany, Italy, and Netherlands are moving very slowly as they try to increase their reserves.

EU sanctions on Russian oil will be complete at the end of the year. Natural gas from Russia’s Gazprom, which used to provide about 40 percent of the EU’s total gas consumption, looks about to stop, after weeks of being turned on and off as Putin looked for leverage on the EU.

Excerpted: ‘Europe’s Great Energy Game’.