Russia’s military action against Ukraine forced the Western world to face some hard truths about that country’s powerful position in world energy markets.
In Europe, the invasion produced worry about possible disruptions in vital energy imports. In the United States, it led to calls for a stronger American oil and gas sector with increased government support.
Beyond the volatile up-and-down swings in energy prices immediately following the onset of the Ukraine war, concerns emerged that the incursion could have an unbalancing effect on world markets for years to come.
More than three weeks after the start of the Ukraine conflict, the International Energy Agency released a “10-Point Plan to Cut Oil Use” for global energy conservation. It reported the plan could reduce world oil demand by 2.7 million barrels per day within four months, offsetting an expected loss of Russian crude supply.
Russia’s Energy and Export Profile
Overall, the past two decades included numerous trends that have strengthened Russia’s hand in energy geopolitics – and one major development that went the other way.
“Russia is endowed with significant natural resources, not only all types of fossil fuels but also minerals and agriculture,” said Mark Finley, fellow in energy and global oil in the Center for Energy Studies at Rice University’s Baker Institute for Public Policy.
It is “by far the biggest exporter of energy in the world today. They have become a significant exporter of LNG, which being shipborne, can go wherever the market signals for it to go,” he added.
Finley has served as an analyst and manager at the U.S. Central Intelligence Agency, responsible for assessing the implications of developments in global oil and other energy markets. He edited a daily intelligence summary for cabinet-level U.S. economic policymakers as well as the president’s daily brief, and regularly briefed the summaries and other analysis to senior U.S. officials.
Later, for 12 years, Finley was senior U.S. economist at BP, where he led production of the BP Statistical Review of World Energy and was responsible for the company’s long- and short-term oil market analysis.
Russia has been the world’s largest exporter of natural gas and is the second-largest exporter of crude oil, behind Saudi Arabia, he noted. Almost all of those exports go to Europe or Asia. It recently supplied around 40 percent of Europe’s natural gas and lately has accounted for about 25 percent of the European Union’s oil imports, according to Eurostat.
Although Russia’s oil production and exports grew steadily during the Soviet era, the country was not a major factor in world oil supply for most of that period, with “not a lot of trading between the Soviet Union and outside countries,” according to Finley.
“Back in those days, you had a line item that said, ‘Net Communist Exports,’” he recalled.
That changed with the expansion and extension of pipelines from Russia and the growth of other shipping methods. Russia also developed a significant export trade in minerals and precious gems. According to Bloomberg, it is the world’s third-largest producer of nickel, supplying 17 percent of the world’s high-grade nickel output.
Russia ranks as the largest diamond-producing nation in the world, estimated to produce over 25 percent of global output, valued at more than $3.4 billion. And it is the second largest worldwide producer of platinum.
In addition, Russia is the world’s largest wheat exporter, selling 38.5 million metric tons of wheat in 2020-21, according to data from the U.S. Department of Agriculture. Russia and Ukraine together provided more than a quarter of the world’s wheat imports in 2019.
It is also Europe’s largest supplier of thermal coal. Last year, Russia supplied EU member states with about 36 million metric tons of thermal coal, and world coals markets reacted strongly to events in Ukraine.
By March, there was “simply an almost complete absence of surplus thermal coal available globally. Prices have shot past $400 and the $500 per tonne (metric ton) mark seems to be in play,” said Steve Hulton, vice president of coal at Rystad Energy in Oslo.
Earlier this year, Russia finalized agreements with China for increased coal and natural gas shipments in coming years, following an earlier agreement to supply India with up to 40 million metric tons of coking coal annually.
Through partnering with Saudi Arabia and OPEC in late 2016 to form the OPEC+ coalition, and then paring back output to help bolster world crude prices, Russia gained even more influence in global energy markets. That move also made political criticism from its OPEC+ producing partners less likely.
But one crucial development during the past two decades affected Russia’s role in world energy in a completely different way.
In 2008, U.S. crude oil production appeared destined to fall below 5 million barrels/day, then to drop even lower. America faced a less certain energy future, a muted voice in energy geopolitics and a potentially crippling dependence on imported oil.
That didn’t happen. Technological breakthroughs enabled U.S. operators to tap into both oil and natural gas unconventional resources, American crude production rebounded and by 2018, the United States was the world’s largest oil producer.
Why Are Oil Prices So High?
In early March, President Joe Biden signed an executive order to ban U.S. imports of Russian crude oil, liquefied gas and coal, which the White House called “a significant action.” Finley said it would make little difference in oil prices, and critics noted the U.S. market accounted for only a tiny portion of Russia’s energy exports.
“Whether the United States imports oil from Russia or not is not the point,” because “it’s a global marketplace and when prices go up one place, they go up everyplace,” Finley observed.
American oil industry advocates called for a loosening of federal regulations on domestic energy development and criticized the Biden administration’s energy policies, especially restrictions on oil and gas leasing on federal lands and Biden’s 2021 revocation of a key permit for the Keystone XL pipeline.
“They’re all factors, but they aren’t the reason oil is more expensive. Keystone XL was not even going to be operational until 2023, according to the company’s own press releases,” Finley noted.
He said “investor caution” recently has been the biggest obstacle to more rapid development of U.S. unconventional oil resources, while OPEC’s gradual approach to lifting previously imposed production cutbacks wasn’t sufficient to alleviate supply shortages or to moderate world oil prices.
“They’ve been parsimonious in the way they’re returning oil to the marketplace,” Finley observed.
The EU Dilemma
Europe’s response to the assault on Ukraine included a vow to reduce the region’s reliance on Russian energy imports, but not an outright ban, primarily reflecting its heavy dependence on Russian natural gas exports.
Germany especially relies on Russian gas, and the subsea Nord Stream 2 pipeline from Russia to north Germany became a symbol of the European Union’s dilemma in regard to Russian energy resources.
Russia ships natural gas westward to Europe through pipelines that run though Ukraine and Poland. Those countries collect transit fees on the pipeline throughput, and Russia has long complained that the fees are excessive.
Ukraine has earned as much as $1.2 billion a year from gas transit fees. As a conduit for Russian gas shipments, it plays a critical role in facilitating European gas imports.
Bloomberg reports that Russian natural gas supplies to Europe through Ukraine are continuing as normal, despite the war, and Moscow is still paying in “hard currency” for the trans-shipment services, the head of Ukraine’s largest state-owned oil and gas company said.
Fuel deliveries will continue as long as it’s “technically possible,” Yuriy Vitrenko, chief executive officer of NJSC Naftogaz Ukrainy, said in a Bloomberg TV interview, adding that he was speaking from a bunker as Russia continued shelling a number of sites in Ukraine.
As of this writing, Russian gas producers have so far avoided European Union sanctions, as have major state-owned banks Sberbank PJSC and Gazprombank PJSC, Vitrenko said. That means gas exporters can use their accounts to get revenues and pay back international contractors.
The Nord Stream 1 pipeline – actually a set of gas pipelines – began operations in 2011-12. The system runs under the Baltic Sea from northwest Russia near Estonia directly to Germany, so its throughput is not subject to transit fees.
Nord Stream 2, owned by a subsidiary of Russian gas company Gazprom, would have protected even more Russian gas from transit charges. The line was completed in 2021 but requires operating certification by Germany before beginning transportation operations.
Immediately prior to the Ukraine invasion, German Chancellor Olaf Scholz essentially blocked certification of Nord Stream 2, which had been the target of repeated sanctions by the United States, according to the Congressional Research Service. But Scholz stopped short of permanently rejecting Nord Stream 2 licensing.
“Gas impacts are very concentrated,” Finley noted.
“The dynamics are completely different. Oil is a global marketplace and natural gas isn’t. From an energy perspective, oil is a global problem,” he said.
To monitor the ongoing effects of the Ukraine war and Western sanctions against Russia, Finley said he was watching energy inventory storage levels around the world and the import and export movements of international energy supply, among other indicators.
He said he used to tell his analysts, “If you’re going to look at where energy prices are going and you can only look at one thing, look at inventories.”
Russia’s Two-Edged Sword
A significant economic consideration for Russia is that it cannot withhold or disrupt world market deliveries of energy or other commodities for long without seriously endangering its own income. Finley cited the fundamentals of why energy markets exist. Purchasers of Russian crude oil, natural gas and coal need the energy resources, while Russia needs the revenues.
“They do have a strong position, but it is not an unassailable position. Dependence can cut both ways, as Russia has learned the hard way,” he said.
“I think this episode has prompted one positive, in the realization that energy and climate policy is not an either/or choice,” Finley observed.
He said the Ukraine situation has highlighted the need for broader energy conservation, meaningful cuts in energy consumption and secure and adequate production of fossil fuels – in the energy choices facing society today, “the answer is, ‘All of the above,’” he added.
“Of course it matters that the United States is self-sufficient. Of course it matters that the U.S. has a vibrant domestic energy industry,” he said. “The reality is, if we want to have a functioning society today, we need fossil fuels.”