Russia-Ukraine conflict and the broader impact on global energy markets

The Russia-Ukraine war has led to a fluctuation in the energy markets as they react to Russian oil and gas disruptions, including US President Biden’s announcement to ban US imports of Russian oil.  The global energy ramifications of the conflict are profound. As a major oil and gas supplier – to Europe in particular – Russia has the power to weaponize its fossil fuels. And that has markets worried.

The Center of Global Energy Policy at Columbia University has hosted two foreign policy experts on energy: Angela Stent and Meghan O’Sullivan to discuss the conflict’s impact on the global energy markets.

According to O’Sullivan Russia has no interest in bringing the energy prices down or giving the Biden administration a win. Europe does not intend to ban Russian oil imports yet.

Similarly Stern indicated that Europeans have been much more shocked by this event, as they really thought that this was a Europe at peace, with the idea of a major war on their doorsteps. “So of course, they’re not going to stop importing oil from Russia now. But I think we should watch as the weeks go by. And if this conflict really drags out and the humanitarian crisis becomes worse, I think the Europeans will be willing to take actions that they wouldn’t have dreamed of doing, you know, three months ago.

O’Sullivan indicated that a European governments’ ban on Russian oil would be a step too far for European economies. If there is a disruption, it would be more likely to come from the Russian side. The Russians, as we know, gas is very important to their economy, but it’s not nearly as important as oil is to their economy.

Meanwhile, Dr. Harry Verhoeven, Senior Research Scholar with the Center on Global Energy Policy, believed that economies of the world’s least developed countries (LDCs), depend heavily on imports of oil and, less frequently, gas and coal.

He explained that historically, rising energy prices have generated a balance of payments crises and debt accumulation among these countries.

Accordingly, soaring energy bills induced by the Russia-Ukraine conflict are therefore coming at a particularly sensitive macro-economic moment as indebtedness stands at a fifty-year high.

The International Monetary Fund and the World Bank are worried that the turmoil in energy markets and interest rate hikes in the US and Eurozone could cause an inflationary spiral and acute financial distress in LDCs. This is particularly concerning because debt and energy imports are directly connected to water, food, and climate in the world’s poorest states.

Verhoeven explained that For LDCs to respond to climatic changes effectively, they would need to prioritize at least three objectives: inclusive, participation-based adaptation to climate shocks; increasing aggregate energy consumption through low-carbon sources; and making clean, affordable energy more accessible.

As the Russia-Ukraine conflict sends energy prices soaring, the latter two objectives are suffering. With government budgets in Europe and North America now shifting towards increased military expenditure, Western support for energy transitions in LDCs will likely tank.

A handful of LDCs are hoping that soaring oil and gas prices will mean that stalled investments in hydrocarbons will resume: Mozambique has long trumpeted its potential as a world-class gas producer; Senegal intends to use its recently discovered oil and gas reserves to fast-track economic growth; and Angola has promised to instrumentalize higher oil prices to restructure its eye-watering debts. Yet most LDCs are net importers of energy and face balance of payment problems that challenge the imperative of climate-resilient adaptation and energy transitions.

There is another potential outcome of the Russia-Ukraine crisis that has been much less discussed. Western investors have started pulling capital out of Russia, indicating that meaningfully pursuing Environmental, Social, and Governance (ESG) objectives is incompatible with doing business in or lending money to Russia.

Moreover, Oil and energy expert Mark Finley told CBS News that in this context of Russia, we’re not only talking about a spike in oil prices, but also natural gas and other commodities – metals, foods. Russia and Ukraine are significant exporters of all of these. And so what’s unique about the shock that we’re going through right now is that it’s not localized to one commodity. This is not an oil embargo. It is a shock across the whole commodity space.” 

He indicated that Russia is actually the single biggest exporter of facet fossil fuels on the planet. They are the biggest exporter of natural gas. They are the second biggest exporter of oil. And significant producers of both oil and natural gas, as well as a producer and exporter of coal.

He added that before the conflict oil prices were about $100 a barrel. Early in the crisis, they rose as high as $130, back down below $100. And even in just the last week have gone back up to $120 and back down to $100.

The general concept is that there is still tremendous uncertainty – and that’s what’s driving this volatility, is the daily news flow. But $100 a barrel is a pretty high price in the historical context. It’s not remotely the highest.

“We saw prices getting as high as $150 per barrel on the eve of the financial crisis in the middle 2000s. And moreover, we have to adjust that for inflation,” Finley explained.

But it’s still a significant increase, and it matters for prices at the pump directly. In fact, you can almost perfectly predict the annual change in US retail gasoline prices by doing nothing other than looking at the annual change in crude oil prices.