A new era gives geopolitics an advantage over market forces

The Ukraine war is redrawing the energy map of the world

The European Union will stop using Russian oil and gas by 2027. From the source

Russia's war on Ukraine is redrawing the world's energy map, and heralds a new era in which the flow of fuel is affected as much by geopolitical competition as it is by the law of supply and demand itself.

Over the past half century, oil and natural gas have flowed relatively freely to markets around the world and reached the highest prices.

But that ended with the incursion of Russian tanks across the Ukrainian border on February 24, and the ensuing Western trade sanctions against Russia.

Although any new order that emerges will not be entirely clear for years to come, experts in energy geopolitics and diplomats agree that it will be less than the world has seen since the end of the Cold War in terms of the free flow of goods.

historical detail

“We are at a real juncture in history,” says former US ambassador to Saudi Arabia Chas Freeman, pointing out that Europe can never trust Russia again to be the primary energy supplier, and that even if sanctions are lifted, countries are proposing new infrastructure. Expensive and advocates long-term alternative supply contracts to map out a new energy.

In turn, the former US Treasury official, Zoltan Bozar, said that the German embargo on Russian crude oil likely means that instead of Russian oil arriving in Hamburg within a week or two, it will take several months to reach China.

It is in contrast to the oil of the Middle East, which will take a long journey to Europe, after it used to go to Asia.

He said that these shortcomings will raise the costs of freight, insurance and financing that support the energy trade.

Russia is losing

Many predict that Russia's energy industry, the backbone of its economy, will shrink because the loss of its largest market cannot be fully compensated.

The Wall Street Journal says Western financial and technological sanctions will undermine Russia's ability to maintain current revenue and production levels.

It quoted oil industry historian Daniel Yergin as saying that “the days of Russia, the energy superpower, are over.”

Trade flows are already being redirected as Western energy companies withdraw from Russia, and shipping companies, lenders and insurance companies refuse to touch Russian exports.

In turn, Russian oil exports to the European Union, the United States, the United Kingdom, Japan and South Korea have already fallen by 563,000 barrels per day, or 32%, from February to April.

According to investment bank Piper Sandler, a complete ban from the European Union means that 2.8 million barrels per day of crude oil, and 1.1 million barrels per day of products that normally flow into Europe, must find a new market.

Gas "weaning"

European leaders will find it difficult to "wean" off Russian natural gas, which mostly comes via the pipeline.

JPMorgan Chase estimates that by the end of 2022 Europe will still receive between 81% and 94% of the amount of Russian gas it used in 2021. The European Union has said it will stop using Russian oil and gas by 2027, but end its dependence on energy Russian can come at a huge cost.

For his part, US President Joe Biden's energy security adviser, Amos Hochstein, said that the United States will not provide incentives for long-term investments in fossil fuels that contradict its plan to encourage the transition to greener energy sources.

"We are trying to help Europe, stabilize the market and protect American consumers while making (Russian President Vladimir) Putin pay the price," he added.

Western sanctions

In addition, the Secretary-General of the International Energy Forum, Joseph McMonigle, said that the increase in energy demand coupled with Western sanctions against Russia, which will reduce its production, may lead to a shortage of global oil.

"If Russia is excluded from the export market, there will be a global recession that will kill demand," he added.

As for the former director of national intelligence under US President Barack Obama, Admiral Dennis Blair, he said that despite efforts to shift US foreign policy away from the Middle East, the region's importance to US interests has returned once again because of the war.

On the other hand, it has become necessary for Russia to work on deepening its relations with Asia and China, to compensate for the loss of its European market.

Russia's exports

Russia previously exported up to 200 billion cubic meters of gas annually to Europe, by far its largest market.

It also sold about 33 billion cubic meters to Asia last year.

Russia has a few LNG projects, which turn gas into a liquid that can be transported by sea, and which would enhance its ability to send gas to Asia, but many of the projects are technically difficult and expensive.

Analysts say Asian buyers are unlikely to replace Europe as a market for Russian oil and gas in the long term.

India, in turn, refuses to ban Russian oil, buying it at a steep discount in the same way that China seeks discounts on natural gas.

Therefore, losing Russia's nearest and largest market would cost it billions of dollars in energy revenue each year, as well as harsh technological sanctions, which would seriously deteriorate the country's ability to maintain its current oil and gas production levels.

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