The war in Ukraine could not come at a worse time for the world economy. It came as the recovery from the Covid-19 pandemic began to lose momentum and inflation accelerated. And yet, when interest rates began to rise, as the world goes through an energy crisis and energy prices are at high levels we have not seen in a long time.
The sanctions imposed on Russia are unprecedented in an effort to cripple its exports, the proceeds of which are thought to be financing the war. But clearly, sanctions aimed at Russia are also hurting the domestic economies of the Western countries that impose them. All of this has high costs for consumers and taxpayers, especially in Europe and partly in the US.
Further restrictions on Russian crude oil exports could push prices back to very high levels – Goldman Sachs revised upwards of Brent crude for 2022 to $ 135 a barrel, from $ 98, and for 2023 to € 115 from € 105 . The world economy could face “bigger energy supply shocks than ever” because of Russia's key role. Goldman Sachs went so far as to say that a scenario in which all gas exports from Russia would be stopped could lead to a 2.2% drop in eurozone GDP in 2022, with a more significant impact on Germany (- 3.4%) and Italy (- 2.6%).
A protracted Russia-Ukraine war will shatter any remaining hopes for Europe's economic recovery after the pandemic. European Commission officials warned of “price shocks”, but added that “at this point we still expect growth to continue”. But the longer this crisis lasts, the greater the risk of the EU slipping into recession.
Few Western economies depend on Russian energy as much as Germany: 55% of the gas, 52% of coal and 34% of the oil and oil products used in the country are imported from Russia. At best, Germany could break free from Russian coal by the fall and oil by the end of the year, but could not set a date for ending its dependence on gas. The German Economy and Energy Minister warned that the cut-off of Russian gas and oil “could cause massive poverty in Germany”. Immediate supply cuts could hurt German population more than Putin.
Gas prices are now 5 times higher than a year ago and oil prices are almost double. Huge export cuts will be needed before Russia's revenues fall below last year's levels.
The goal of the EU and the US remains to accelerate the energy transition and reduce dependence on fossil fuels as soon as possible. They are worried that investing in new fossil fuel projects will lock in their use in the longer term. This was confirmed by US Secretary of Energy Jennifer Granholm, who discussed a strategy to accelerate the energy transition and ensure global energy security at CERAWeek, the world's leading energy conference. At the same time, however, he said that for now the US needs to increase oil and gas production to meet current demand.
Other top US officials say their policies do not hinder new oil and gas production, but at the same time argue that the transition to clean energy is the only way to energy independence in the long run. A little confused. No one would invest in energy projects under such policies unless it is more clear what the long-term future of oil and gas is.
In the United Kingdom, the country's Prime Minister discussed with oil and gas industry executives the increase in investment in the North Sea. This included ways in which the UK could overcome the obstacles faced by investors and help develop projects to be produced more quickly. The UK is also examining its legal commitments on zero emissions in order to speed up licensing of new oil and gas fields in the North Sea for “national security” reasons.
Uncertainty over the future of oil and gas could hurt the EU. . On this basis, and with such conflicting messages, why should any company invest in long-term gas or oil projects – when it can not know what the future holds, beyond the next few years?
An example is the export of natural gas from the Eastern Mediterranean to Europe, which could help reduce dependence on Russian gas. But who would invest billions of dollars in such long-term projects if exports were not secured in the long run? The EU insists that gas use in Europe will be reduced by 30% by 2030 and to zero by 2050. Such uncertainties repel investors. The EU must extend its commitments on gas use by at least 2045.
There is widespread and massive pressure within the EU to quickly and permanently block Russian oil and gas imports to European markets. But Germany resists that. Analysts also warn that the ban on Russian oil could cause a shock similar to the 1979 crisis.
It is recognized that the greater the decline in Russian oil from the market, the higher the price of oil. Such uncertainties have raised the prospect that oil could surpass the previous record high of $ 147 a barrel in 2008 — to $ 200 a barrel.
What is needed is a realistic view of things. Renewable energy sources still have the problem of “production downtime”, while green hydrogen technology is still in its infancy. Therefore, the world will need oil and gas for a few more decades. This must be acknowledged by Europe and the US and the right messages must be sent to unlock investments in new oil and gas projects.
BP's new annual forecast for 2022 shows that by 2040, according to the “accelerating scenario”, more than 50% of global energy demand will still be covered by oil and gas. Without new stocks and production, more problems and more volatility in the markets will be caused.
The appeal to clean energy has only slowed down the demand for fossil fuels, but has not yet led to a significant reduction in their consumption In most countries. This is because renewable energy still has a long way to go before it can replace fossil fuels on a large scale. It still takes a long time.
On the other hand, the concern is that all these recent developments are delaying the fight to curb climate change and global warming. In fact, energy security is a priority now. Indicative of this is the IPCC's new report on climate change that has gone largely unnoticed. With the EU and the US leading the race to accelerate the energy transition, increased renewables, hydrogen and nuclear energy will more and more displace a significant portion of the energy market, which would alternatively be supplemented by gas, including liquefied, for a smoother transition. The global energy perspective is changing very quickly and permanently.
* Charalambos Ellinas is the Senior Advisor of the Global Energy Center, the Atlantic Council. This text was published in the Blog of the Cyprus Economic Studies Society (Cypruseconomicsociety.org)