Markets

The war in Ukraine has turned energy markets upside down forever

An illustration of a tank with an irregular line graph that is bursting.

Illustration: Shoshana Gordon/Axios

Almost a year after the Russian invasion, the Ukraine crisis has permanently reshaped the global energy system and brought severe economic pain.

Why it matters: The worst scenarios did not materialize, thanks to a mix of EU policies, Russian President Vladimir Putin’s misjudgments and sheer luck. But the impact is evident in all aspects of the market, from natural gas to oil to low-carbon energy.

Driving news: Europe’s heavy dependence on Russian gas, which once provided 40% of the EU’s supplies, was quickly ended. It now accounts for only about 14.4% of EU inventories, according to S&P Global Commodity Insights.

  • “Russia’s days as an energy superpower are passing,” noted energy historian and analyst Dan Yergin said.

How does that work: Gas prices in Europe soared to record levels, but have since returned to below pre-war levels. This is partly due to higher supplies from the US and elsewhere, but also due to planning.

  • European nations have taken steps to cut ties with Russian coal, oil and gas and diversify their supplies, conserve energy and fill gas storage.
  • The effort also prompted EU officials to accelerate and scale up efforts to introduce low-carbon technologies such as renewable energy sources and heat pumps. (There has also been a short-term shift to coal-intensive coal, thanks to rising gas prices and shrinking supply.)
  • Luck was also a factor, with unusually mild weather reducing heating demand.
  • “Widespread shortages, once justifiably feared, have not materialized,” writes Financial Times energy editor David Shepherd in a column titled “Vladimir Putin Loses Energy War.”

What they say: Analysts say Putin has misjudged his ability to use Russia’s massive gas and oil exports to Europe as a geopolitical weapon.

  • A report by the Center for Strategic and International Studies (CSIS) said that by cutting gas supplies, Putin “hoped that economic pain would break European and transatlantic resolve to support Ukraine.”
  • Yergin tells Akios that Putin’s “point of maximum leverage has passed” now that Europe has diversified supplies and full storage levels.
  • “He thought that Europe’s dependence on Russian energy would be so great that, in the end, Europeans would regret what happened.” [in Ukraine] but stay away,” he said in an interview.

Yes but: The crisis has brought severe economic pain to Europe, hitting consumers and energy-hungry industries and beyond. For example, CSIS notes that European fertilizer production, which requires large amounts of natural gas, has fallen by 70%.

  • More broadly, it has helped drive up energy prices everywhere, hurting economies around the world due to higher costs of industrial and agricultural inputs, pushing up food prices that hit poor nations particularly hard.

Between the lines: On the oil front, Europe’s recent bans on Russian offshore oil and the G7-led “price cap” aimed at curbing Putin’s income are leading to an increase in the flow of Russian barrels to China and India.

  • As for gas, “Europe’s switch from Russian gas to other supplies has dramatically and permanently changed global gas trade and energy markets,” CSIS writes.
  • The realignment of global energy trade is ultimately coming at Russia’s expense, even as the war fueled commodity price increases that have hit economies around the world over the past year.
  • In a report last fall, the International Energy Agency significantly reduced its projections on the export of Russian gas and oil this decade because not all exports that went to Europe will find a new home.
  • Also, while oil prices remain elevated, the initial spike in prices caused by the war has receded. Brent crude briefly jumped above $130 a barrel in early March when the scope of the conflict and the response were less understood.

intrigue: Europe’s turn away from Putin has increased the geopolitical importance of U.S. exports of liquefied natural gas, which help make up for Europe’s loss of Russian supplies. “Energy security in Europe — and globally — now rests on US natural gas exports,” notes CSIS.

What’s next: The IEA’s latest oil market analysis this month names Russia as one of two “wildcards” that will “dominate” the global oil market in 2023.

  • Another is China, where the COVID restrictions – or lack thereof – are affecting energy markets as they are the world’s largest oil importer.

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