In 1973, the Organization of Arab Petroleum Exporting Countries imposed an oil embargo on the United States, driving up prices. It came at a difficult time for the United States as wholesale commodity prices were already rising at more than 10 percent annually at the time, and many important industrial materials were in short supply.
In addition, the US oil industry had very little excess production capacity, which meant that it was difficult for US energy producers to bring more oil to the market when needed. In the wake of that oil shock, the United States began seeking energy independence to prevent such problems from happening again in the future. During the same period, Europe became increasingly dependent on Russia for its energy needs. So let's discuss why Europe is so dependent on Russia for energy. Can the West impose an embargo on Russian oil and gas? Will such a ban make a difference for Russia? To what extent will Western countries harm themselves by doing this?
First, the European Union is the world's largest energy importer. They import 60% of their energy needs at a cost of more than 350 billion euros a year. Currently, Europe imports 40% of its natural gas supplies and more than 25% of its crude oil from Russia. In the 1960s and 1970s, Europe was producing about the same amount of natural gas as it used to, but production began to decline as the North Sea gas fields ran out, and the Netherlands began closing its own gas fields (this is the largest exporter of natural gas in the European Union) due to earthquake activity. Over the past 20 years or so, the European Union has reduced its reliance on coal in order to achieve its climate goals, with Germany even passing a law to phase out nuclear power entirely. Their last three nuclear power plants are scheduled to shut down in December. Belgium, Switzerland, and the United Kingdom have also reduced their nuclear power generation capacity as well.
Therefore, European countries have turned to Russian natural gas to fill the gap between phasing out existing energy supplies and their transition to zero-emissions renewables and storage that they eventually plan to use as a full-fledged alternative. About 25% of energy consumption in the European Union comes from natural gas, and this dependence on natural gas means dependence on Russia. Some of Europe's largest economies are among the most at risk, with Germany importing 90% of its energy needs. The problem is that this renewable energy is not running fast enough to replace traditional sources of energy.
Russia has the largest natural gas reserves in the world and has been an exporter since the 1940s. Even at the height of the Cold War, it was possible to count on shipments of Russian natural gas. Europe has been dealing with severe energy problems for the past year. After an unusually cold winter the previous year, Europe entered this winter with low natural gas stocks. Then, drying up winds where wind speeds have been at some of the lowest levels over the past 60 years has created a shortage of wind power.
Booming Asian demand and maintenance problems at French nuclear plants combined to put more pressure on prices. Russia has restricted supplies to Europe to pressure it to agree to a new Nord Stream gas pipeline. Standard gas prices more than tripled in Europe in 2021, and average household energy costs jumped by about 55%. When Western leaders began threatening Putin with sanctions for invading Ukraine, these threats were carefully crafted to avoid direct harm to Russia's energy exports, which are the lifeblood of the European economy as well as the Russian economy.
Washington announced last week that it would ban the largest banks in Russia from processing payments, deliberately excluding Gazprombank, which serves the Russian energy company Gazprom. Russian banks that process energy payments are also absent from the list that Brussels has agreed to ban from the Swift messaging system. However, there have been calls for Western governments to step up pressure on Russia. Ukraine's foreign minister has called on governments to impose a "total embargo" on Russian oil and gas. Now, a significant amount of Russia's foreign reserves have already been frozen, and I covered that in my last article. But as long as commodity exports continue to flow, Moscow will receive hard currency, and this time, they will not make the mistake of leaving that currency within the reach of Western governments to be frozen. With today's energy prices, Putin's regime could easily receive $1 billion a day in oil and gas revenues. Economists expect the current sanctions to push Russia into a deep recession while pushing inflation higher this year, and it is clear that this is already happening. However, they do not expect the Russian economy to come to a complete halt as long as the political will in the Kremlin is there to mitigate the impact of the measures.
Cutting US purchases of Russian oil would not be a big deal for the United States, which currently exports only 7% of its oil imports from Russia. The US had reached energy independence just before the COVID-19 pandemic, and could easily return to energy independence with production in Texas and North Dakota back online. Higher oil prices tend to encourage US private sector investment in production and bring more supplies online. The biggest problem for the United States is not access to energy; it's the desire to not isolate its European allies. The German Economy Minister said last week that he opposes any ban because Germany needs these supplies for price stability and energy security. Diplomats in Brussels said that only informal talks on oil and gas sanctions have taken place so far. Indeed, at the moment, many Western banks, oil refineries, and shipowners " On Wednesday, a major Russian oil producer failed to award bids to sell about 6 1/2 million barrels of Ural crude. This basically means that if you are a Russian oil company trying to sell oil, there is a ban on all but the name.
In theory, Russian crude is not sanctioned, but everyone is hedging their bets at the moment, acting as if it is. At the moment, Russia transfers approximately 450 million dollars of gas to Europe per day at current prices. Most of that goes to Germany, Italy, and the Netherlands. In contrast to oil, European buyers continued to buy Russian natural gas and even increased the amount they get under long-term contracts with Gazprom, which is now cheaper than buying gas on the spot market. Kadri Simpson- The European Union Energy Commissioner declared on Monday that Europe's energy supply is sufficient to weather the winter, but the Russian invasion painfully illustrated Europe's weakness. Next week, she said, the committee will present a proposal on strengthening energy independence, especially from Russia. But the recent increase in energy prices, along with inflation in general, complicates this goal.
Europe has already boosted its LNG imports and refilled some of its gas stores, but there is no quick alternative to Russia that can be brought online in the short term. A European ban could happen, but it won't be easy. Currently, global commodity prices are on track to achieve the largest weekly price rise in more than fifty years. Last week's events caused sharp gains in grain, metal, and energy prices. For example, yesterday wheat futures closed nearly 22 percent at a 14-year high of $12.89 a bushel. Energy is an important part of the Russian economy; oil and natural gas sales generate nearly half of Russia's export earnings. So, sanctions on Russian oil will seriously harm the Russian economy, even if trade continues with China and other countries that have not joined the sanctions.
Putin announced $118 billion in new oil and gas deals with China after the Winter Olympics last month. While this might be beneficial for Putin, a situation in which Russia's only trading partner is China would put Putin firmly in Xi's pocket, which would probably not be an attractive position for him. The drop in international demand that Russia is already seeing for its oil could force them to shut down some oil wells, which could be hard to get back up and running-oil wells don't turn on and off just by clicking the way many people imagine. Act. The other option for Western countries is to reduce oil imports rather than stop them completely. This was done with Iran, where cuts of 20 percent were imposed every six months. As warmer weather approaches, this becomes easier for Europe. Twenty EU countries are members of the International Energy Agency, and they are required to hold at least 90 days of oil reserves. If the oil supply is severely disrupted, they can decide to release these stocks into the market.
If the West imposes an embargo on Russian oil and gas, policymakers expect these measures to have an effect similar to the sanctions imposed on Iran in 2018. These actions focused on reducing Iran's revenue from oil exports to zero. While Iran's economy has suffered greatly, with massive inflation that peaked at 48% in 2018 and is expected to remain above 25% for the foreseeable future, the country is still able to export oil to friendly countries like China and wealthier Iranians with political ties. They are still able to maintain their luxurious lifestyles. While the economy is not doing well, it still does, which allows the leadership to claim that they are living and winning the "economic war". You see, it's all complicated, and there are no easy wins here for anyone.
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