For years, America warned Europe about its over-dependence on imports of Russian oil and gas. The Europeans, especially Germany, failed to heed the message, and continued with importing ever-greater volumes, failing to understand the geopolitical implications. By 2021, Russia had been supplying about 40% of EU demand for natural gas. Putin tried to weaponise that dependency, but he has not succeeded – at least, not yet. Indeed, the reverse has been the case: Russia now sells its energy exports at discounted prices to India and China, and US exporters are selling more volumes than ever before. Energy security (coupled with food security) is now at the top of the agenda for almost all countries.
When Putin invaded Ukraine, he might have expected that soaring energy prices would help pay for his aggressive campaign. But he probably did not expect that within days of the invasion, the EU would agree to slash imports of Russian gas by the end of 2022, replace them before 2030, reduce energy consumption, and “fast forward the green transition”. In effect, it planned to reverse decades of dependence on Russian oil and gas within months. Western countries followed up with tough sanctions against the Russian energy sector. And last September, mysterious explosions destroyed parts of the huge Nord Stream gas pipeline system linking Russia and Germany.
The effect has been extraordinary: see the chart below, with the blue line representing seaborne oil imports from Russia to Europe sinking like a lead balloon. As the FT puts it, “Russia’s fossil fuel dominance in Europe has been shattered”.
India and China buy Russian oil at discount prices
US oil and gas producers have capitalised with bumper profits and exports. The war put energy security on the global agenda in a way it hadn’t been since the 1970’s Organization of the Petroleum Exporting Countries (OPEC) oil embargoes. In the wake of the war, European and Asian utilities have been signing deals to keep buying American energy into the 2040s as they diversify supply. Even as the US and EU try to accelerate the transition to clean tech fuels, American fossil fuels are becoming more central to global trade and energy security.
Since the start of 2023, the US has become the world’s largest exporter of liquefied natural gas, replacing Australia and Qatar at the top of the tables. The war has been a boon for the US’s Liquefied natural gas (LNG) industry, with shipments to Europe rising 140% compared with 2021; equivalent to about half the volume Russia once piped to Europe. Germany has committed about USD10 billion to increase import capacity of LNG. Three floating terminals are in operation, another three are due to launch in coming months and more are planned.
Unfortunately, Australia has failed to fully capitalise on the opportunities presented. The Australian Government’s Department of Industry, Science and Resources predicts that Australia’s resource and energy export earnings are forecast to decline to $390 billion in 2023–24 from a record of $460 billion in 2022–23.
Source: Dept of Industry, Science and Resources
In oil, western sanctions such as the Group of Seven’s (G7) price cap on Russia’s exports have shrunk its market share in Europe. US and Middle Eastern exports have filled the gap, while Russia ships discounted barrels to Asia, instead.
Wars are inherently unpredictable, and have unpredictable consequences.
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