- Politicians on both sides of the Ukraine conflict are mobilizing energy policy to advance “war” aims.
- This weaponization of energy has already massively disrupted energy markets — from trade flows to state intervention — and threatens to derail the global economic recovery.
- The emerging new post-Ukraine war global energy architecture also has profound implications for the energy transition, accelerating it in some places, pressing the pause button in others.
Energy market risks are proliferating. First, there is the danger that repeated market intervention will generate such volatility that fresh policy interventions will be required to respond to it, fundamentally undermining free energy markets. High prices and the energy transition could also spur de-globalization, including as recessionary pressures limit energy trade. The push for security of supply via homegrown energy transition supply chains also displaces the cross-border oil and gas trade that helped drive globalization in the first place. The world’s energy architecture is being fundamentally reshaped.
State Intervention
Market interventions are already in full flow, and appear to be having a domino effect. For example, the push for a price cap on Russian oil exports largely emerged to blunt the price impact of EU embargoes on Russian crude and products coming into force in December and February, respectively. And while secondary US sanctions on producers like Iran and Venezuela have become standard, the G7 price cap, if implemented, would mark the broadest and most complex (consumer-side) intervention in oil markets ever.
Energy subsidies are also emerging as a major fiscal drain on government budgets, and risk blurring market signals. A recent study by the OECD and International Energy Agency of 51 countries shows government support for fossil fuels almost doubling to $697 billion in 2021 compared to the previous year. And “we expect this year much more than we saw in 2021. We are currently on track to double the amount,” notes OECD Trade Policy Analyst Gregoire Garsous. “Of course, governments need to act” to soften the impact of current prices, he concedes. But it should be targeted specifically at those most vulnerable, he argues. Decreasing the price for everyone just “mutes the price signal and you kill incentives to switch to alternative fuels,” slowing the energy transition, he argues.
The EU in particular is discussing unprecedented proposals to ease consumers and businesses’ price pain, ensure energy companies’ survival and reform its electricity market. Broadly, what policymakers are doing is starting “to step away from the competitive and liberalized market that has taken us 30 years to create,” says gas expert Professor Jonathan Stern. But impacts here are unpredictable.
Then there is the fallout from greater trade protectionism, whether direct or indirect. Energy trade is an important component of overall global trade. But the OECD drive for security of supply and to fast-track domestic renewables expansion will lower trade over time. Protectionist-leaning renewables policies could also spark disputes, even among allies. This can be seen in the current tensions between Washington on one hand and its EU and Asian allies (South Korea and Japan) on the other over measures to encourage US electric vehicle and battery production.
Transition Turmoil
Ukraine might have given a boost to global coal consumption, but both US and EU policy moves suggest that on balance the Ukraine war might well be accelerating the clean energy transition in the OECD. However, the opposite will probably be the case in the non-OECD, argues Bassam Fattouh, Director of the Oxford Institute for Energy Studies. In the developing world, finance for climate adaptation and clean energy projects is harder to come by as a result of a strong dollar and high energy prices, fueled in part by OECD policies. The ability of OECD countries — already lagging pledges — to extend support is constrained by the economic slowdown and Ukraine war expenses.
At the same time, the real-world impacts of climate change as highlighted by ongoing flooding in Pakistan have focused minds in the global south as to industrial nations’ historic responsibility for climate change. “We are likely to approach COP27 in a different spirit, in a very divided world,” notes Fattouh.
High energy prices could also create tensions between energy haves and have-nots within the OECD. Energy made up some 54% of EU inflation in January-April 2022, but only 24% of US inflation, hinting at potential misalignments should the burden of current policies escalate: Essentially, mega-producer the US looks set to have a “better war” than Europe.
Energy De-Globalization?
“Mastery itself was the prize of the venture” was how Winston Churchill, then Lord of the Admiralty, described the decision back in 1911 to switch the British Navy from coal to oil feedstock. The decision gave real momentum to the search for new sources of oil and helped create the international oil trade seen today — both key drivers of globalization in the 20th century. Now, the shift to renewables looks to be driving de-globalization.
But getting the energy transition right will be just as central to great power status this century as controlling energy flows was in the last century. And while Russia’s invasion of Ukraine exploded the myth that economic interdependency is a guarantor of peace, a deglobalized world isn’t necessarily more stable. On the contrary, the toxic brew of trade protectionism, high energy prices and economic stress could fuel prolonged instability. That said, in most recession scenarios, energy demand collapses and prices fall. But then, “of course, we will have lots of other problems,” notes Stern.
And even should demand for oil peak and fall, the percentage of low-cost Mideast crude as a share of oil trade is likely to increase. Energy trade could also be sustained by both increased demand for LNG and the possible emergence of a large-scale international green hydrogen industry that could develop around solar hot spots in the Mideast Gulf, Chile and Australia.
Perfect Storm
It is striking just how central energy has proved to be in both the Ukraine war and as a driver of global inflation. But other factors, too, have been critical. The world managed to prosper in 2011-13 with oil prices that were higher, even without taking inflation into account. Back then, the impact of expensive oil was softened by gains in global efficiency, driven largely by China-dominated supply chains and increasing globalization.
Today, in addition to astronomically higher gas prices, there is a perfect global economic storm of supply chain bottlenecks (exacerbated by China’s zero-Covid approach), rising interest rates and food shortages triggered by the war. Add to this an energy system in flux and outcomes are far from clear, barring that there’s likely no return to the pre-Feb. 24 world.
