The great oil shocks of the 1970s taught western politicians a sobering lesson about the might of the world’s energy superpowers. Fifty years later, that lesson is being learnt all over again.
Russia is fighting back against western sanctions by restricting the supply of gas to Europe. The prospect of a total cut-off of Russian gas is causing near panic in Europe as Germany and other major economies contemplate energy rationing this winter. Meanwhile, Joe Biden — worried by soaring petrol prices ahead of the midterm elections — has had to forget his campaign rhetoric about treating Saudi Arabia as a pariah. The US president is off to Riyadh next month to appeal to the Saudis to pump more oil.
The lesson seems to be simple and dispiriting. In 2022 — as in 1973 — the world’s major oil producers can still make the world’s biggest political powers dance to their tune.
But look beyond the immediate headlines and the geopolitics of energy are much more complex. Russia has a strong hand in the short term but its position will dramatically worsen over the next three years. America has a big problem in the short term but is in a strong position over the long term.
It is the EU that has the biggest short- and medium-term problems. Despite brave talk of diversification and decarbonisation, the Europeans are still a long way from finding a viable new energy strategy.
Russia and the EU are locked in a race against time. The Russian goal is clearly to engineer an economic crisis in Europe this winter — so weakening the EU’s support for Ukraine. The government of Hungary, noted for its indulgent attitude to Putin, is already pressing for a quick ceasefire in Ukraine, citing the threat of economic catastrophe.
The Europeans have several months before winter to prepare for the coming Russian squeeze. But even if Moscow’s pressure tactics do work in the short term, over the long term Putin is destroying one of the main pillars of Russian power.
Europe has now learnt a bitter lesson about the dangers of energy-dependence on Russia and is determined never to be as vulnerable again. One senior German official says: “Before the war, Russia was looking at 30 more years of guaranteed oil and gas revenues. Now they are looking at three.”
Even in the short term, cutting off Europe’s gas exports is a dangerous game for Russia. Roughly €1bn a day is still flowing into Russia’s coffers, mainly from Europe. If Putin sacrifices those revenues, his ability to wage war would rapidly diminish.
Russia can find alternative markets for its oil relatively easily — witness the eagerness with which India and China are increasing imports of its discounted oil. But its gas is exported by pipeline and the major pipelines head towards Europe. Constructing new ones to China will take years, so Russia could soon be faced with a stranded asset.
The earnestness of European efforts to free themselves from dependence on Russian energy can be seen in the travel schedules of its leaders. Ursula von der Leyen, president of the European Commission, has just been in Israel and Egypt, signing a new gas deal. Olaf Scholz, the German chancellor, recently visited Senegal and threw his weight behind the development of a new gasfield there.
There remains a big question, however, about how quickly and smoothly Europe can replace Russian energy. Some senior figures in the energy industry are privately sceptical. The situation over the next five years is likely to leave Europe in an uncomfortable position — with the need for Russian energy reduced, but not eliminated, while consumers face persistently higher prices and industry faces insecure supplies.
America, by contrast, is in a much more comfortable long-term position. According to Dan Yergin, a leading energy analyst, America has displaced Russia as the world’s leading exporter of energy.
Higher energy prices are a pain for American consumers, but they are a boon to the US shale gas industry. One lesson of the Ukraine war is that it is dangerous for a country to rely on a geopolitical adversary for its energy. America is now a big net exporter of energy, while China remains heavily dependent on imports.
But American production alone cannot protect US consumers from rising global oil prices. America’s desire to isolate not just Russia but also Iran and Venezuela has strengthened the position of Saudi Arabia. It is impossible, even for the US, to treat all the world’s major oil-producers as pariahs at the same time. And unlike Russia or Iran, Saudi Arabia is a longstanding American ally.
The real threat to the Saudi position is not geopolitical but environmental. Decarbonisation may eventually mean that the world is no longer buying what the Saudis are selling.
In the short term, however, the global energy crunch caused by the war in Ukraine is increasing demand for non-Russian fossil fuels — including coal, the dirtiest of the lot. Germany is reopening mothballed coal plants. And China is clinging even tighter to its most reliable form of domestic energy production — coal.
Russia’s invasion of Ukraine is bad news for the world. It may be even worse news for the planet.