Prof. ST Hsieh
Director, US-China Energy Industry Forum
626-376-7460
February 28, 2023
War has consequences, one-year of war has caused untold damages and sufferings to Ukrainians. But the secondary energy war has global impacts. The following report summarized well: “an energy war that upended markets and imposed painfully high energy costs on people worldwide.”
To punish Putin for starting the war, the US led West swiftly imposed severe sanctions against Russia. Of course, Russia has been weakened by these sanctions, but Putin’s military is still fighting in Ukraine. There is no sign that Ukraine can conclude the war by kicking all the Russians out anytime soon.
Obviously, sanctions cut both ways, Europe luckily escaped a major disaster this winter because the weather has been mild. Even though the sanctions against Russia have been unanimously supported by EU nations so far, the cost to each nation is different. Specifically, what if the war lasts another year, how long these sanctions will be uphold by every nation in EU is a major issue of concern.
The effectiveness of any sanction against Russia must depend on the unanimous support of every nation in EU, it is also critically depending on Russia’s ability to counter these sanctions. The latest sanction scheme, the EU price gap on Russian oil, so far has not been working as expected. One reason is that the price cap had been on the table for a long enough time so that Russia developed counter measures. The more fundamental reason that price cap does not work is that crude oil is a global commodity: there are many major suppliers as well as many major importers. Unfortunately, the EU as a bloc is not a key oil producer nor is it one of the top importers. Rather, the EU’s economy is being degraded everyday by the war.
Everything takes time, ending the Ukraine war, defined traditionally by a winner and a loser, will take much time and significant resources.
Why the West is not making any peace effort now?
One year after Russia’s invasion of Ukraine: An energy war and massive disruption
by Breanne Deppisch, Energy and Environment Reporter
February 24, 2023 03:30 AM
Russia’s invasion of Ukraine one year ago resulted in an energy war that upended markets and imposed painfully high energy costs on people worldwide.
Here are some of the consequences.
PAIN IN EUROPE
But EU leaders were quick to halt business with Moscow in the wake of the invasion, passing eight separate sanctions packages targeting its energy sector in an effort to starve Russian President Vladimir Putin of his primary source of revenue.
The final sanctions packages exposed deepening fissures within the bloc, however, and on more than one occasion prompted Hungarian Prime Minister Viktor Orban to threaten to veto the deal.
But EU leaders spent much of 2022 in a desperate race to fill their gas storage tanks before autumn, hoping to store as much gas as possible as the bloc braced for its first winter without Russian fossil fuels.
But thanks to a remarkably mild autumn and winter, Europe was granted a reprieve.
In November, unseasonably warm temperatures descended across the EU, breaking high-heat records in more than 11 countries and sending temperatures climbing as high as 35 degrees above average. As a result, gas storage remained higher than even the most optimistic models had suggested.
Mild conditions are expected to last through March, the end of the EU’s winter season. Currently, their gas tanks stand at about 71% full, far above analysts’ predictions and putting member countries in a far better position than expected as they begin to fill their coffers for the next winter season.
US PROVISIONS EUROPE
The Biden administration jumped at the opportunity to facilitate more liquefied natural gas shipments to help Europe replace lost Russian gas.
But the Biden administration may not have been prepared for the massive surge in demand it was met with: Over the last 12 months, overseas buyers inked more than four dozen long-term contracts and contract expansions for U.S. LNG.
European buyers have notably been party to many of these contracts, falling second only to Asian buyers.
The surge in new contracts has put President Joe Biden at odds with some environmental constituencies and has prompted some to suggest it could even put his climate legacy at risk.
RETURN TO NUCLEAR ENERGY
Some countries have extended the lives of nuclear reactors or reversed their long-held positions on nuclear power amid rising concerns about supply shortages.
In Europe, some countries long opposed to nuclear power have slowly warmed to the idea, especially as a near-term bridge to replace Russian supplies.
Last year, leaders were forced to walk back their nuclear phaseout plan, which had the country on track to shut down all of its nuclear plants by the end of 2022, and instead move to extend the lifespan of its three remaining reactors.
OIL PRICES
Global oil prices skyrocketed in the immediate aftermath of Russia’s invasion, sending prices from $76 per barrel to more than $110 per barrel, surpassing the $100 mark for the first time since 2014.
In June, futures for international Brent crude climbed to a whopping $120 per barrel, their highest point since 2008.
This touched off a painful increase in gas prices for U.S. drivers, who saw the national average rise to an all-time high of more than $5 per gallon in June.
In an effort to alleviate the high prices and protect his fast-dropping approval numbers, Biden in March ordered the release of 180 million barrels of oil from the Strategic Petroleum Reserve, the largest one-time release ordered by a president in U.S. history, draining the nation’s crude stockpile to its lowest point in 40 years.
But the drawdown prompted criticism from Republicans, who argued that the sales could limit the nation’s ability to respond in an actual supply emergency.
G-7 OIL PRICE CAP
The United States and other G-7 economies began pushing last spring for a price cap on Russian oil exports. The two-part cap, which took effect in lockstep with the EU’s ban on Russian imports of crude and refined petroleum products in December and February, respectively, was designed to limit Russia’s excess energy profits also encouraging it to continue to produce.
But roughly three months since the first part of the cap came into force, analysts say it’s difficult to say how much, or even if, the price cap is curtailing Russia’s profits.
That’s because Russia has spent months amassing a fleet of “ghost ships,” or unregistered crude tankers, to allow it to ship outside the price cap.
According to data from the Financial Times, Russian ghost fleet shipments have increased from less than 3 million barrels in November to more than 9 million barrels in January, the first full month since the price cap on Russian crude came into force.
Earlier this month, trading giant Trafigura estimated Russia could have as many as 600 shadow tankers on the water, amounting to roughly 20% of the global fleet.
Russia “can really move oil outside the reach of open shipping and insurance systems,” Ben Cahill, a Center for Strategic and International Studies analyst, said in an interview. “And it’s just becoming murkier all the time.”
And on Thursday, Yellen said the cap does appear to be curtailing Russia’s profits by as much as 60%.
“The way I see it, our sanctions have had a significant negative effect on Russia so far. While by some measures, the Russian economy has held up … Russia is now running a significant budget deficit,” she added.
LOOKING AHEAD
Even one year into the war, it can be difficult to assess just how much this punishing tranche of sanctions will hurt Russia.
“No sanction is going to start one day and immediately create this huge shift in Russia’s war effort or in Russian policy,” said Doug Klain, a fellow at the Atlantic Council’s Eurasia Center who specializes in Russia, defense, and international security.
“Many of these things are designed to have a cumulative effect that we really aren’t going to see in full for quite some time — perhaps years or even decades in some of these cases. But in putting all these things into force, they build on each other over time,” he said.