Insight
The impact of the Ukraine war on global energy markets by Nick Butler, 14 July 2022 Instability in world energy markets will continue beyond the war in Ukraine. Europe will be less dependent on Russia’s fossil fuels, but a weakened Russia could still cause problems. The war in Ukraine is not about oil and gas, but the conflict has further disrupted an already volatile situation, in which energy prices were rising due to post-lockdown energy demand exceeding supply. The consequences of Russia’s attack on Ukraine will take years to play out, whatever happens next: the only credible forecast is of uncertainty and further price volatility. To give some idea of the range of that uncertainty, the following analysis considers what is happening now, what might happen in a year’s time, and what could things look like two to three years from now. What is happening now The physical operations of the energy trade changed little after Russia’s invasion of Ukraine on February 24th. Oil and gas have continued to flow from Russia to Europe, even through the pipelines which cross Ukraine. Since the invasion, energy prices have risen sharply, significantly benefiting Russia and other oil and gas producers. In early April, EU foreign policy chief Josep Borrell said that imports from Russia have been costing Europe at least €1 billion a day. Only in late June were physical gas supplies cut – not as a result of any Western sanctions but because Russia has chosen to deny supplies to countries such as Poland and Bulgaria, which refuse to pay in roubles, and to countries such as Finland, which has applied for NATO membership. In each of these cases, the limited supplies which have been cut have been easily replaced. However, on July 11th Russia also shut the major NordStream 1 pipeline for scheduled maintenance, potentially cutting up to 60 per cent of supplies to Germany. If Russia chooses not reopen the pipeline, those supplies will be harder to replace. The risk has led the government in Berlin to accelerate the implementation of the next stage of its emergency response plan. The price rises seen over the past year – 60 per cent for oil and a remarkable 400 per cent for natural gas in Europe – have been driven by two factors. First, the surge in demand as the pandemic faded around the world, and then after February 24th by fears that western sanctions and Russian retaliation would cut back trade and trigger a fierce competition for available supplies. CER INSIGHT: The impact of the Ukraine war on global energy markets 14 July 2022
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