Prof. ST Hsieh
Director, US-China Energy Industry Forum
March 8, 2022
At the same time of the following news report from BBC, US President Biden announced banning Russia oil and gas effective immediately. US has been debate banning Russia energy import to US for some times, so it is not news. The US is the world largest energy producer and exports natural gas via pipelines as well as LNG: banning Russia gas is rather symbolic. It has no impact on natural gas supply in the USA and it does not affect Russian bottom line. But it does send a signal to global energy market that “things are not good” and the energy prices go up.
US imports about 3~5% of Russian oil in terms of daily imports. It is not significant at all, banning Russian oil will increase local gasoline prices somewhat. But Biden’s announcement today obviously has taking into consideration of the potential negative impacts for the USA already. After all, US Congress would have passed a law for banning Russian energy today. Majority of the US public does support the ban anyway. So, Biden made the right move today. However, if the war does not end soon enough for Biden to tame the US inflation before the mid-term election, then Biden and Democratic are exposed.
Another challenge for Biden is “pain sharing” with allies. People in the US support the ban and willing to pay for high energy cost now, but Europe nations by and large does not follow US policy move. The EU unveiled a plan to cut Russian energy dependence by 2/3 at the end of 2020. They also made the commitment that Russian energy dependence will end by 2030, which is eight years away. The expectation is that Ukraine war will not last much longer and a cease fire could be reached in weeks, if not sooner. After the hostility is ended, Europe will enter another case of “economic reconstruction” similar to the end of WWII, 77 years ago. While is the needed energy?
The worst case is that Russia will respond to oil ban by the west in kind: cutoff energy supply to Europe completely and instantly. No wonder, Marcon and Scholz conducted a virtual summit with Xi yesterday.
War in Ukraine: Russia says it may cut gas supplies if oil ban goes ahead
By Daniel Thomas & Michael Race Business reporters, BBC News March 8, 2022.
The Nord Stream 1 gas pipeline was inaugurated just over a decade ago
Russia has said it may close its main gas pipeline to Germany if the West goes ahead with a ban on Russian oil.
Deputy Prime Minister Alexander Novak said a “rejection of Russian oil would lead to catastrophic consequences for the global market”, causing prices to more than double to $300 a barrel.
The US has been exploring a potential ban with allies as a way of punishing Russia for its invasion of Ukraine.
But Germany and the Netherlands rejected the plan on Monday.
The EU gets about 40% of its gas and 30% of its oil from Russia, and has no easy substitutes if supplies are disrupted.
While the UK would not be directly impacted by supply disruption, as it imports less than 5% of its gas from Russia, it would be affected by prices rising in the global markets as demand in Europe increases.
Iain Conn, the former boss of British Gas owner Centrica, said natural gas was “less freely” traded compared to oil, and it would be “much more difficult” to replace Russian gas if supplies are affected as it is transported through fixed pipelines from country to country.
The price of Brent crude – the global benchmark for oil prices – rose to around $130 a barrel on Tuesday following reports that the US and UK will announce its own ban on Russian oil imports.
In an address on Russian state television, Mr Novak said it would be “impossible to quickly find a replacement for Russian oil on the European market”.
“It will take years, and it will still be much more expensive for European consumers. Ultimately, they will be hurt the worst by this outcome,” he said.
Pointing to Germany’s decision last month to freeze certification of Nord Stream 2, a new gas pipeline connecting the two countries, he added that an oil embargo could prompt retaliation.
“We have every right to take a matching decision and impose an embargo on gas pumping through the [existing] Nord Stream 1 gas pipeline,” he said.
Russia is the world’s second largest gas producer and third largest oil exporter, and any move to impose sanctions on its energy industry would badly damage its own economy.
Nathan Piper, head of oil and gas research at Investec, said although imposing sanctions on Russia’s oil and gas exports was attractive, “practically it is challenging”.
He said both the global oil and gas markets were tight ahead of the war in Ukraine “with limited spare capacity to replace any disrupted Russian volumes”.
“The question is now whether US and European leaders are prepared to endure high oil and gas prices to add energy exports to the sanctions list,” he told the BBC.
“The threat of this action is almost the worst of both worlds, forcing prices up but doing nothing to limit Russian volumes or the revenues flowing to Moscow.”
Analysts at Capital Economics have forecast oil prices could rise to $160 a barrel if the West imposed sanctions on Russian exports, but David Oxley, senior global economist at the consultancy, told the BBC it was disruption to Russian gas that would hit countries harder, describing it as a “completely different kettle of fish”.
He said energy intensive industries across Europe could be hit, with “vast swathes of heavy industry being switched off” as it is much harder finding replacement gas suppliers compared with oil.
EU countries heavily reliant on Russian gas, such as Germany, could switch from gas to coal, he said, but that would run counter to the bloc’s climate ambitions and would not be a long-term solution.
The energy markets have been supremely volatile over the past week, and understandably so. There are genuine fears that supplies of oil and gas from Russia could be cut off or disrupted.
Yet the response to Russia’s suggestion it could close a major pipeline, depriving northern Europe of a large chunk of its gas supplies, has been pretty muted so far.
There are a couple of reasons for this. Firstly, Russia is threatening a tit-for-tat embargo – cutting off its gas exports if the West goes ahead with a ban on Russian oil.
But despite pressure from the US, such a ban is unlikely. European leaders have already poured cold water on the idea – so Russia’s counter-threat carries relatively little weight.
And then there’s the fact that Russia is still making huge sums from sales of oil and gas to Europe every day, helping to fund its war.
Moscow has everything to gain from exploiting traders’ nerves to push up energy prices; but a great deal to lose if it were to carry out its threat.
Ukraine has implored the West to adopt an oil and gas ban, but there are concerns it would send prices soaring. Investor fears of an embargo drove Brent crude oil to $139 (£106) a barrel at one point on Monday – its highest level for almost 14 years.
Meanwhile, wholesale gas prices rose to 565p per therm early on Tuesday, but fell to 480p in the afternoon.
UK stock markets rose slightly in early trading after a volatile Monday caused by the US’s discussions over a potential Russian oil and gas ban.
Early on Tuesday, nickel prices on the London Metal Exchange more than doubled to rise above the $100,000-a-tonne level for the first time, before trading in the metal was suspended.
Russia supplies the world with about 10% of its nickel needs, mainly for use in stainless steel and electric vehicle batteries.
Average UK petrol prices have hit a record 155p a litre
Quoting unnamed sources, Reuters news agency reported that the US might be willing to move ahead with an embargo without its allies, although it only gets about 3% of its oil from Russia.
However, German Chancellor Olaf Scholz has dismissed the idea of a wider ban, saying Europe had “deliberately exempted” Russian energy from sanctions because its supply could not be secured “any other way” at the moment.
European powers have, however, committed to move away from Russian hydrocarbons over time, while some Western companies have boycotted Russian shipments or pledged to sell their stakes in Russian energy companies.
Mr Novak said that Russian companies were already feeling the pressure of US and European moves to lower the dependence on Russian energy, despite fulfilling all its contractual obligations to deliver oil and gas to Europe.
“We are concerned by the discussion and statements we are seeing regarding a possible embargo on Russian oil and petrochemicals, on phasing them out,” he said.