21 May 2023 - 14:22
  • News ID: 473064

War in Ukraine and changing geopolitics of energy

Fereydoun Barkeshli, Energy Market Analyst
War in Ukraine and changing geopolitics of energy

As the war in Ukraine surpassed the one-year threshold with no solid evidence that it may end soon, the international oil and energy markets demonstrate its resilience to stand to the task. International oil market and energy market was once hit by COVID late 2019 and suffered hugely throughout 2020 and part of 2021. However, thanks to coordination between OPEC and non-OPEC producers, the market found its way towards normalcy and stability.

While the global oil and energy markets began to embark upon better days, the news of Ukraine war broke out and the international oil markets experienced the second blow from the war in the European heartland. Although it began with gas, spread to all other spectrum of energy from coal to nuclear as well as LNG and renewables.

Such a blow to the global energy markets was not seen since the Second World War. However, back in 1972 and Arab oil embargo, world experienced severe disruptions.

Sanctioning Russian energy

United States of America is in the business of sanctions. Washington has adopted sanctions as a principle foreign policy tool against its rivals and is in the process of forcing all others to join in and sanction whatever that makes Washington unhappy. As I am writing this, a total number of 37 countries are under some sorts of US sanctions. Number of sanctioned cases including companies, institutions and organizations, individuals and issues are so diverse and huge that Washington’s Treasury Department has increased its personnel by six times during the last decade.

Having said that, the global oil, gas and energy markets weren’t disrupted by war but as the results of sanctions that were imposed by the US and EU plus Japan, South Korea, Australia and New Zealand. It’s ironic that no country in the global south opted to impose sanctions against Russia. Talking of Global South, I mean three-fourths of the world population that includes the entire Middle East, India, China, Africa and South America. This is just to let us remind ourselves that how wrong has the West gone with the South.

Global North has imposed nine sets of sanctions packages against Russia since late February 2022. Packages include the followings:

Sanctions against 120 individuals in top administration and company management.

Financial sectors, all banks and money exchange headquarters and branches.

Asset freeze of all US dollar and US dollar-based bonds and equities in overseas banks

Critical infrastructures, including oil and gas terminals, pipelines, ports, airports, power stations and operations related to each of the sectors.

Military, military-related or dual use equipment as per definition of the EU and the US.

These sanctions together include some 43 percent of the Russian economy. Sanctions have basically aimed the Russian oil and gas sector. Most other sanctions are energy-related. However, as mentioned above all the sanctions are designed and implemented by 31 countries labeled as global north. No other country has recognized provisions related to the above-mentioned sanctions. Global North or as commonly known Global West have modeled long years of sanctions against Iranian economy and against Russia.

De-globalization of world economy

Imposition of sanctions on Russian oil and gas has virtually ended one era of global energy security. One era has come to an end but the new era isn’t born yet. A new era is about to be born and come into existence within the current decade. Global oil markets and the world economy has yet to see the new era and new roadmap for the international oil market.

As the French finance minister said recently, the main objective of Russian sanctions as all other sanctions, is a regime change strategy. Many of the current sanctions against Russia appear to be run-of-the-mill restrictions used against several other countries. A number of them including export bans and the freezing of certain assets have been imposed on Russia since its annexation of Crimea in 2014. Even the exclusion of some major Russian banks from SWIFT system is not new. Two most controversial aspects of this new rounds of sanctions are:

Freezing of Russian gold and foreign currency reserves, and oil and gas export sanctions.

As said, these types of sanctions have already been deployed on other countries and on Russia itself. What makes the difference is about the simultaneous imposition of several sanctions all at once and within a short span of time. The sanction against Russia is at least two times more and all in less than six months. The current sanctions against Russia are now heavier than those imposed on Iran, Syria and North Korea put together. None of these previous sanctions were even remotely as powerful as Russia a member of G20, and the world’s most powerful nuclear country.

Likewise, none of the 63 central banks that are members of the Bank for International Settlements (BIS) in Basel- known as the central bank of central banks- has ever been the target of financial sanctions. The BIS itself has even joined in on the sanctions in order to prevent Russia’s access to its offshore reserves. This really is unprecedented. Since its inception in 1931 the BIS had never taken such a measure, not even during the World War 2.

So, what should we expect from the sanctions. Western think tankers will hamstring the Russian economy and energy sector, sow discontent among the Russian people and possibly even go for some sort of regime change, but history suggests otherwise. Russian economy is dependent on energy for most of its foreign exchange earnings but foreign currency is not all that the Russian economy needs. Sanctions are a form of weapon of mass destruction. As such the country under sanctions will have all options on the table.

Europe under US-led Russian energy sanctions

Washington had all sanctions packages against Russia ready and laid out. Russian forces entered Ukraine on 24 February 2022 and the first sanctions package was imposed on 2 March 2022. Sanction packages kept coming one after the other and by February 2023 that marked one full year of the war reached over 15 thousand items. The hardest ever in the history.

Europe has so far spent $1 trillion on the US-led sanctions against Russia. I insist emphasizing sanctions, since the war in Ukraine did not disrupt the flow of oil or gas to Europe. In fact, gas flow was pretty normal prior to the Nord Stream 2 gas pipeline explosion. It’s interesting to note that the flow of Russian piped natural gas to Europe via Ukrainian territory is still at its pre-war volume level.

When it comes to energy market disruptions and the inception of a new global energy politics, the following aspects are considered the most outstanding:

*Natural gas prices increased in US and EU after imposition of sanctions but began to rebound to the autumn level of 2022. That is to say, still high compared to pre-war range. However, gas prices have to stay high enough in Europe in order to initiate further investments in building terminals and storage facilities.

*Russia’s natural gas exports to the European Union have sharply declined in the last eight months and after Nord Stream 1 and 2 explosions.

*The US exported 58.7 MT of LNG during the first nine months of 2022 (EU’s share was 33.2 MT). It is needless to say that by the time Western alliance sanctions were imposed on Russian energy and financial systems, most European countries had filled up almost 53 percent of their existing facilities from gas already imported from Russia.

*The EU is heavily reliant on the US and Norway for gas supply. This dependence on gas imports from the US at a much higher price compared to the Russian gas, has led European societies to a wave of discontent as the social value of supporting Ukraine at a cost that Europe may not be able to pay for some years to come.

*Brent prices briefly increased following the war but began to fall prior to imposition of Price Cap regime by the US and EU and the so-called Northern Alliance. Nevertheless, both US and EU markets need oil and gas prices high enough to compensate for a much-distorted energy market.

*The US government withdrew some additional 200 million barrels of crude by the end of 2022. Strategic Petroleum Reserves, SPR was designed in 1975 in order to safeguard OECD members at times of war and crisis. SPR isn’t meant for commercial objectives. US administration is required by law to replace the volume of withdrawn volumes within a period of six months.

*Chinese crude oil inventories (commercial and SPR), are higher than the US SPR. Also, for the first time in history of global oil markets. China traditionally refills its SPR and commercial inventories when prices are low and releases while prices are higher.

*Saudi Aramco OSP (Official Selling Price), played an important role in maintaining stability in the oil market in 2022. This was interpreted as a support gesture by Riyadh for Russia.

*Russia’s crude cargoes keep moving and something like 600 ships carry crude from Russia to unknown destinations since sanctions were imposed by the Western Alliance in December 2022. In the meantime, costs of crude carriers have been more than doubled since the imposition of sanctions against Russia.

*India increased oil purchases from Russia at the highest rates ever. Parts of the imported crude finds its way to Europe and elsewhere. India is regarded as an outstanding winner in Russia’s energy sanctions.

*Chinese crude imports from Russia declined as compared to 2021. However, according to tanker tracking reports, a large volume of Russian crude is bought by China via unidentifiable channels.

*Russia’s crude oil output failed to return to pre-war levels of 2021. However, the lost volume is stated below 0.5 mb/d. One major issue is related to insurance problems. Some 90 percent of international insurance companies are Western and mostly London- based. Insurance of cargoes with Russia oil is not possible unless it is re-diverted to another one.

*An important dilemma for “OPEC plus” is the future ceiling and quota arrangements. “OPEC plus” is currently about 0.5 mb/d higher than the official ongoing production.

Shale factor

US shale oil production is expected to rise to 9.56 mb/d during the current quarter of 2023. This up by 2.2 mb/d compared to the same quarter last year when the war started. America was a net crude oil importer back in 2015. US has become a major oil, refined oil and gas exporter right after the war in Ukraine. In fact, on the supply side, the US is even better-off than OPEC.

However, the underlying factor is that for Shale to prosper even further and add more to volume, it’s safe when prices are at around $90 per barrel and for a long time. Shale oil/gas producers are small to medium companies that rely mostly on banks to support them financially. Over recent years, more international oil companies and oil giants have been attracted towards Shale ventures with big capital and technology. As such shale is becoming more resilient towards volatility and price fluctuations.

EU is currently importing LNG from United States at over four times the price of gas that was supplied by Russia via pipelines. EU doesn’t have sufficient terminals and storage facilities to re-gasify LNG. They have to be built in order to import more LNG and refined products from the US at several times the EU imported just a year ago. To be more precise, Europe is financing the growth of shale oil and gas industries in the US. It’s ironic that shale production is much more polluting and environmentally damaging the non-shale oil and gas production. War in Ukraine and Russian oil and gas embargo turned the United States into a net energy exporter again. A scenario that could have not been thought of in half a century.

Shale factor hasn’t only pointed at rivaling Russia and capturing its traditional oil and gas markets in Europe. Energy insecurity that was shaped up by sanctions on Russia, encouraged European industries to move parts of their operations to the US. Germany, the most industrial country of Europe is heavily dependent on safe and secure flow of energy at a reasonable price. Russian sanctions have now induced Germany to move its more energy-intensive industries to the US and Canada. As of now, companies like VW and Airbus have begun to move parts of their operations outside Europe.

Such measures and mentality concepts in Europe lead to a new era that could be branded as Geopolitical Recession. In the course of time, such trends can distort Europe’s position as the birth place of the first waves of industrial revolution away to Asia and the Global East where major oil and gas producers, as well as principal consumers of all types of energy reside. This is the challenge to globalization as defined and understood by West. To be even more precise, the future of Europe will be decided in Ukraine. For EU member states, Ukraine is a defining moment. It’s for EU to decide about its future energy security and energy access. It’s for EU to decide its future security arrangements. Europeans outsourced their security to the United States for 70 years after the Second World War. The US is now demanding that money back by way of buying more weapons from America and spending more on military equipment that will finally end up in the US coffers. The United States seems to have now been engaged in a NATO-style energy security arrangements with Europe.

Middle East and global South is on the right side of the history as far as oil and energy diplomacy is concerned. The world economy and business has realized that it should move to locations within safe energy access. For now, Europe proudly woes a 19 percent cut on total energy consumption, but has it been achieved without economic costs and a downturn trend that Europe will have to live up with for years to come.

Iran Petroleum

News ID 473064


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