While gunfire was heard in Ukraine’s capital city, natural gas continued to flow normally through major pipelines linking Russia and Europe on Friday. However, the invasion and associated sanctions cast a shadow over long-standing energy ties for the foreseeable weeks and the longer term.
The world already faces high energy costs and a supply shortage that has left consumers with high utility bills, and increased gasoline prices. Russia’s attack against Ukraine has whippedsawed the energy markets, not only because Europe relies on Russian natural gas supplies. Russia is also a major oil producer.
These are the key facts to understand about the impact of the invasion on energy.
WHAT IS THE SITUATION ABOUT OIL AND GAS PRICES?
After Russia’s invasion of Ukraine, a barrel of U.S.-standard crude oil soared to $100. Natural gas prices also rose, despite operators stating that pipelines were operating as before.
Both dropped as U.S. officials and European officials stated that sanctions against Russia wouldn’t interrupt energy supplies and payments through banks for oil and gas shipments.
However, fear of a supply disruption has rattled markets and people. As people fled fear of fighting in Ukraine, some Polish gasoline stations saw lines and ran out of fuel Friday. A spokesperson for the government said that Poland has ample fuel reserves.
Rystad Energy analysts claim that Russia accounts for more then 30% of Europe’s gas used for heating homes, industry, and generation of electricity. Other potential sources of gas are not well prepared to fill the gap if Russian gas is cut off.
They stated that while it was unlikely for Russia to stop gas exports, gas pipes from Ukraine (which accounts for 8% of European gas supply) are very dangerous.
Although liquefied natural gases brought by ships from the U.S. have helped to alleviate some European gas shortages this winter, it is still very expensive.
Rystad reports that natural gas prices in the U.S. are now approximately 60% higher than they were a year ago.
WHAT DOES IT MEAN TO CONSUMERS?
This conflict adds to the rising energy prices in Europe and the U.S., which is reducing consumer spending and slowing economic growth. Analysts at Berenberg bank believe that inflation will rise if oil prices rise to $120 a barrel and gas prices stay high. This would slow down economic growth in this year.
Analysts believe that gasoline prices could rise to $4 per gallon in the United States in the next few months.
Mark Wolfe, executive director, National Energy Assistance Directors Association, stated that this will cause consumers anxiety and that the government has not come up with a way to help families cope with rising gasoline prices.
High gasoline prices are most severe for lower-income families, as they are more likely to need to drive to work. How can ordinary Americans prepare for this?” They already have tight budgets.
European governments have offered cash subsidies to consumers who are affected by rising utility bills. Some heavy gas users have shut down or reduced production, like producers of fertilizer which has become more costly.
Higher fuel costs have led to higher prices for farmers and this will also affect food prices. People who switched to discount suppliers, which rely on energy coming from wholesale markets, have seen their bills rise or had their contracts cancelled due to high losses.
High home heating bills are a major problem for many American households. They spend 40% more on natural gas and heating oil than they did last year.
WHY DID SANCTIONS NOT TARGET OIL FROM RUSSIA AND GAS?
U.S. officials made it clear that they don’t want to stop Russia’s energy shipments, despite the fact that this is a major source of funding for Russia’s military attack on Ukraine.
Global energy supplies are limited and prices are high. The U.S. would be forced to cut off Russian oil, which would cause prices to soar and increase inflation in the U.S. and Europe. However, Europe would not be able replace Russian gas.
GAS SUPPLIES – COULD THEY BE TOTALLY REMOVED?
With 83% of Gazprom’s 2020 sales, Europe is Russia’s largest customer.
Gazprom is trying to diversify its business by selling to China. However, Russia does not have any liquefied gas terminals capable of sending gas to any destination without an import terminal. It will take years to build new connections to China.
“Russia has limited capacity to divert gas flows towards China, and it will grow over time, so the EU will have options,” stated Alicia Garcia Herrero chief economist for Asia Pacific at Natixis bank.
Rystad Energy says that Russian gas exports generate more than $300 million per day for the Kremlin — revenues they can’t afford to lose.
Analysts have considered it unlikely that Russia or Europe would cut off all gas supply. Both sides are dependent on each other.
Russia is also a major supplier to Europe of crude oil, with more than 2,000,000 barrels per day being refined into gasoline and diesel fuels.
Analysts believe that Russian oil could be more easily made up than gas. In theory, U.S. companies might increase oil production and export more to Europe if there are supply disruptions. However, sanctioned Russian oil could end up in China.
WHAT DOES IT MEAN LONG-TERM?
This war has raised questions about Europe’s dependence on Russia for its gas supplies.
“The events in the last days demonstrate the foolishness of not diversifying our sources of energy, and our providers in the recent decades,” stated Mario Draghi, the Italian Premier. He spoke to parliament Friday.
Gazprom did not sell additional gas beyond its long-term contracts, which led to Europe’s winter shortage of gas resources. This raised concerns about Russia’s willingness to leverage gas.
After the invasion, the German government made a significant step by freezing approval for the Nord Stream 2 pipe. This was opposed by the U.S. as it would increase Europe’s dependence on Russia.
However, it will take many years to find new energy sources. Europe will continue to require natural gas to power its electricity plants, until renewables can be developed enough to replace falling domestic production. Energy Intelligence analysts predict that prices will remain high until the middle of 2020s due to tight supply.
Claudia Kemfert from the German Institute for Economic Research Berlin, a energy expert, stated that long-term solutions include increasing investment in renewable energy development to combat climate change.
“We are now in a new era. Kemfert stated that there was a day when Russia invaded Ukraine, and another day after. We are paying the price for the delayed energy transition because prices for fossil fuels are increasing.
A significantly accelerated energy transition is the best way to end fossil fuel wars. It will bring about peace.