Using high crude oil and natural gas prices, Brussels is enforcing its will on member countries and citizens.

Having being hit by severe demands from its members not to push too fast and too soon, and spare gas during the conflicts and energy transition, while even tentatively suppressing nuclear energy plants, Brussels EU Commissioner took different but unconventional and possibly economically dangerous road. This might surprise you that I engaged with energy transition in the middle of a bad war.

You are right to be surprised that renewables, people and climate change enthusiasts are actually happy to see the war happening and consider the war and EU reliance on Russian energy as an opportunity to push even harder for transition.

Oil Sanctions

Right after the start of the conflict between Russia and Ukraine, international oil prices shot up dramatically. Brent crude well passed $100 per barrel and practically fluctuated in the vicinity of $110. What surprised everyone including myself is that it didn’t fluctuate wildly as previously anticipated. It’s no secret by now that OPEC and the OPEC plus have ran out of spare capacity. There’s no country or group of countries that can compensate for the lost Russian crude (and products). Russia delivered some 5.7 million barrels per day just some weeks ago. Markets are taking it easy. Wind, sun, water or air have enough energy to compensate for the lost Russian oil and two other major oil producers namely, Venezuela and Iran.

There are now confirmed reports that the United States is buying Russian oil in daylight, though sometimes through gray zones at discounts and sell their own shale oil mostly from to Europe. Russian oil is bad for Europe and the alliance of the sanction team but not for the US. In the meantime, within the European Union, the EU 3 or EU 3+1 ( Germany, France, Italy plus Britain ) also buy Russian oil and gas and pay for it in Ruble and prohibit other EU members from engaging into business with Russia. This went as far as some smaller members of the European Union like Denmark and Ireland asked for their own European Union away from the big 3 who dictate their own version of sanctions policies on the rest of the Union.

Here are therefore some answers to the puzzle of the security of supply in Europe. Russian oil and products exports are down some 9 percent since the formal approval and imposition of sanctions but the leading members of the alliance keep buying and reselling Russian oil and products to other EU members.

Russia-Ukraine crisis has virtually surfaced an old debate that in this European Union all are equal but some are more equal.

Within the alliance of oil producers, those countries with their limited spare capacity are the winners but the United States remains in the forefront of Russian oil embargo gains. US is, of course, wining in other fronts too that include sales of arms and military equipment.

America is also winning in that the burden of NATO military expenses has now shifted from Washington to Europe. United States skillfully changed the Russian/Ukraine war into the war of energy and tightened its grip on oil flow and energy security that was undermined by Russian oil and gas exports and close engagement with OPEC. President Biden militarized energy in a war that is fought some seven thousand kilometers away from its own land. America has skillfully converted Ukraine into a proxy battleground for NATO against Russia. I reckon that for Washington, Ukraine is the European version of Yemen.

Welcome to America’s new oil sanctions show. Direct purchase of Russia’s oil by Europe contradicts principles of democracy but buying it from America through US intermediate at a higher price is in defense of democracy and principles of the Northern Atlantic Treaty Organization. It is a sanction comedy.

Russia-Ukraine Conflict

Russia produced some 10.4 million barrels per day of crude oil and condensate. Russia’s total exports of crude oil and products was about 7.5 million barrels per day four months ago, prior to the war in Ukraine. Some three-fourth of Russian oil and condensate and products were exported to Europe by ship or through pipelines. Russia satisfied around ten percent of global oil demand.

For natural gas, Russia is in second following the US, producing some 1.7 billion cubic meters per day compared to 2.5 billion cubic meters produced in the United States. All Russian gas is exported through pipelines to Europe. Around 40 percent of Europe’s gas requirements is supplied by Russia. However, it’s not evenly distributed. Germany relies on Russian gas by around 50 percent, while some others rely as much as 20 percent. Such a huge dependence of European countries on imported oil and gas and even coal from Russia, means that Europe could sooner or later enter a process of de-industrialization that has never experienced before in the textbooks of development economy.

Once Europe go down economically, China and Asia will begin to experience recession, too. Most of Europe’s industrial goods is exported to China and other Asian countries and most notably to the ASEAN countries. In return, Europe buys a lot from China and Asia. Therefore, the supply chain is distorted and Europe as the leading continent is to enter the new era of industrial civilization and will go down in history together with Asia as an inspiring continent to experience growth and prosperity.

A peculiar characteristic of fundamentals of energy concept is that, once price of oil increases, it doesn’t stay there and within oil itself. Chain reactions follow. High oil price rapidly involves several other products and items: directly and indirectly. It’s infectious. The chain reaction rapidly spread throughout the economy.

No sector of economy is immune. From food to chemicals, industrial products and services are impacted by higher oil prices. Within the energy sector too, price of gas, electricity or coal is also directly oil- related. Having said that the global energy security fundamentals got to be redefined or redesigned. Many things have changed. President Biden visited Asia in May this year but refused to go to the Middle East.

Not even Saudi Arabia and Zionist Regime. Saudis are no more considered close allies and strategic friends. Saudi Arabia is now a rival in international oil markets. Biden is reviving shale oil and shale gas production and exports like no other president since mid-1990’s when shale oil and gas appeared in the US energy map. Shale gave geopolitics of oil, gas and energy a new meaning.

I intend to say that we need to differentiate between the concept of “Geo-politics” and that of “Geo-strategy”. Back in early 1980s, the victory of Islamic Revolution in Iran and then the war of Saddam against Iran, eliminated over 7 million barrels per day from the market. Market was perplexed and in total panic. Uncertainty prevailed in a way not seen since early 1970s.

Markets and consumers felt the pain. However, there were adjustments in the course of time. Supply/demand equation was restored and markets stabilized. Other producers entered the scene and raised production. Prices were down again and markets witnessed series of severe market share wars amongst members of OPEC. At some points of time prices went as low as $10 per barrel. This is what I called geopolitical impact of oil crisis. Geopolitical developments are adept to adjustments.

On the same page if we examine the oil market fluctuations and turbulences back in 1996-97, when Asian financial and monetary crisis started after infamous November 1997 conference of OPEC ministerial conference in Jakarta, Indonesia, oil prices fell overnight and stayed low for as long as the Asian financial crisis lasted. A much more powerful turbulence occurred when 2007-2008 US market crash started. Financial crisis of the United States started from housing sector with no direct relations with oil and energy. But it was more than a market crash. It redesigned the whole international oil market. Prices moved to a higher corridor after an initial crash.

Emergence of environmentalists and climate change advocates began to shape up. Solar and wind were no more considered major substitute and new sources of energy as were once referred to for fossil fuels substitute. Fusion, hydrogen and other forms and brand-new sources of energy emerged in Europe and elsewhere. This is an era of geo strategy. This left a lasting and deep impact on the global oil (and gas) markets. 1970s and 1980s oil crisis erupted from inside the oil industry. 1990s and 2000s crisis erupted from the financial sectors, stock exchange or financial systems that malfunctioned. Outbreak of pandemic in late 2019 onwards was from outside the oil and energy sector, too.

In Russia/Ukraine war, we now have a combination of the two. World has lost a huge volume of oil and oil products. A huge quantity of gas is on the verge of elimination from the global markets because of war and sanctions. On top of all that, there’s a sanction on Russian dollar currency reserves with the US and international banks that has discredited US Federal Reserve as a safe haven for international reserves currency.

Some $370 billion of Russian reserves is blocked and out of reach. China has over $1 trillion of reserves in the form of bonds, treasuries and cash with the Federal Reserve of the United States. Japan, South Korea, Taiwan and many more countries keep dollar and dollar-denominated assets with the US Federal Reserves. They are friends and allies of America for now but future relationships may change. Panic prevails. Countries with huge dollar reserves from Beijing and Tokyo to the Middle East and Persian Gulf states are now worried about the destiny of their reserves in dollar.

Global Divide

As mentioned earlier, global financial system is fragmented. Business houses, banks and individuals are partially or totally distrustful of current financial system that prevails since 1971 when Richard Nixon dismantled gold standard and US dollar was made to replace gold as the international monetary backbone. When gold standard was introduced in Bretton Woods in 1947, United States had won the Second World War and possessed the largest stocks of gold. With the war in Vietnam and Korea before that, plus the gradual reemergence of Europe, Washington changed its financial policies and replaced dollar for gold.

In later years, Swift was introduced. America was made the master of the world financial system. One important factor here was that since the American companies ruled the international oil market and virtually owned or operated in the Middle East and America itself, dollar was unanimously accepted as the single most commonly and accepted medium of international oil pricing system. Back then, no single commodity was more widely traded than oil. As such, dollar owed most of its power and influence to oil.

What has now happened is that under US sanctions on Russian oil, Moscow has demanded its own currency, Ruble to be accepted as the medium of oil trading settlement. This is going to spread to other currencies and transactions. More countries including the Middle Eastern are now trading their oil in currencies other than the US $. This is a major aspect of geo-strategic developments that is already gaining momentum. A new World Oil Order is shaping up.

When foreign ministers of BRICS, an association of Brazil, Russia, India, China and South Africa met late May this year, no country came up in condemnation of Russia for the war in Ukraine. In fact, two-thirds of the world population is one way or the other are against US/EU sanctions on Russia. Surprisingly, individuals such as Henry Kissinger who was US chief foreign policy architect for the last four decades has condemned Washington-designed sanctions against Russia.

This is an enormously complex situation. North-South divide has never in recent history been vivid as today. This has to be seen in the context of the complex North-North relationship. Just two years ago, Americans had a president in the White House who openly asked NATO to be dissolved and that US had nothing to do with NATO. There’s now a president who promotes expansion of the North Atlantic Treaty Organization. The perplexing question that people in Europe keep asking is; what next. What’s going to be in store if the next president of the White House charge mind and feel like distancing from NATO again.

This is a dissipating situation. There are five neutral sovereign states in Europe namely; Sweden, Finland, Switzerland, Austria and Latvian. Two of them have officially submitted their request to join NATO. An organization that could have been dissolved back in 2020 when it fell out of favor by Donald Trump.

There’s already some sort of suspicion in Europe that Washington might have indirectly persuaded Russia to go to war in Ukraine. President Biden kept repeating that Russia wants to enter Ukraine months before the Russian army actually engage in fighting in Ukraine. President Biden is repeating the same mantra for China. The Americans are repeating and emphasizing that China intends to occupy Taiwan. President Biden encourages wars in different countries. Keep selling arms and persuade others to fight.

United States is in the business of Afghanistanization of Ukraine, a term other than Balkanization. That is to be interpreted as a forever war. A situation of no real peace or war. A permanent source of tension that lures Europe into more reliance on the US. Sharing a greater burden of keeping NATO and still selling more weapons. This will ultimately mean a weaker Russia, too. As the war may prolong, so do the costs.

Engaging Russia on the European front also means paying less attention to southern borders and Asian neighborhoods.

Climate Change Diplomacy

Paris climate change accord of 2015 was the most aggressive climate gathering in the history of countries advocating environmental protection. Several deadlines, too many recommendations and punishment measures against the counties that cannot adhere. This year in Glasgow, the mood had changed but the motives and agendas behind the motives had not been changed a bit. Europe has designed to weaponize the climate issue. A war by the North on South. This is a weapon by which affluent western countries design to influence countries of the South.

War in Ukraine greatly changed the attitude of the European Union. They realized or faced with three painful realities:

1- Oil and gas are the dominant players and major sources of energy far beyond 2050

2- Most of oil and gas is located in the east

3- Oil and gas aren’t available in abundance

War in Ukraine helped major oil and gas consuming countries to take another look at oil and gas and refresh their understanding of the situation and redefine their ambitions on climate policies.

However, it is needless to say that oil and gas producing countries have to address the issue of environmental factors and climate change. OPEC and OPEC plus have no common or unified climate policies. They often make contradicting decisions and policy approaches without digging the depth of Europe’s environmental protection policies. Undoubtedly, West is going to weaponize climate change issues sooner or later. Penalties will be imposed on countries using fossil fuels to sustain their development plans and well-being of their society. Europe and the US are in alliance for putting a cap on Asian growth and prosperity. Imposition of restrictions on energy consumption of choice is an important tool that can only be achievable through tough international sanction regimes for the pattern of energy production, consumption and distribution.

New Energy Century

In conclusion, the Russia-Ukraine crisis highlighted the significance of the energy security. Energy security is redefined, in that energy supply security is against the energy demand security. Consuming countries cannot keep fighting oil and gas in one front and then get back to OPEC and other producers and beg for oil at the time of crisis and hardships.

Nevertheless, I do not envisage a global financial re-set as an eminent characteristic of the new energy century yet. It depends on how the war in Ukraine proceeds and evolution of regional pacts and groupings such as Shanghai pack or ASEAN and BRICS. We are entering an era of de-globalization and regionalism.

Shanghai pact constitutes 40 percent of the world population. This number of population with average age of below 35 need oil and gas to develop and survive. If we add ASEAN, BRICS or ECO, two-thirds of the world population live in between Asia and Latin America. They do not share the view that they must support Europe in sanctioning Russia or any other countries’ oil and gas. Let Europe go alone. The world is united against sanctions on energy.

As for Europe, the continent has to grow out of the mindset that Europe’s problems are the world’s problems but the world’s problems are not Europe’s problems. Climate and environment and Ukraine are Europe’s problems and they have to solve it on their own. It’s too selfish and self-centric to demand that the world must bow to Europe’s priorities.

In conclusion, it is however important to watch how the world economy and the US economy in particular performs. US Federal Reserves considers the average rate of inflation at 8.5 percent for the first half of 2022 which is at twenty -year high. In such junctures, America historically needs a war to survive. This time, United States is in fact at war but a proxy war fought at the expense of others in Ukraine. The Russia-Ukraine crisis is a gift for the United States. Russia and China are both excluded from major international scenes and North-South divide deepens.

The new energy century is yet to arrive, though not all from renewables.

By Fereydoun Barkeshli,

President, Vienna Energy Research Group

Courtesy of Iran Petroleum