It is a sight to marvel at. We have a united western front for the first time in decades. A consolidated response was not expected when Russia amassed troops on the Ukrainian borders. Some countries agreed to sanction Russian energy sectors (just the USA, for a fact) and some got wary of the inflationary repercussions. The only united stance was ‘No military involvement’ that could lead to a direct confrontation with Russia.
In hindsight, everything but that has changed. The Russian economy is gradually evaporating; Russian offshore currency reserves are frozen and seized; even the ‘untouchable’ oil and gas industries are getting tamed to pressure Putin into an unlikely submission. But while Russia suffers (at least economically), I cannot help but question: Is it going to end well for Europe? Sure, the global economy is integrated with the US dollar rather than the Russian ruble. And despite being a significant oil producer, Russia only contributes roughly 11 percent of the global oil production. However, Russia is far more etched into the global economy, particularly the European markets, than one might casually assume. Maybe you are confusing modern-day Russia with the isolationist Soviet Union!
The oil prices were higher than ever recorded in the previous decade before recent developments eased the searing pressure. A welcome prospect? Not so much! Peaking back into immediate history, the oil price war of 2020 seems like such a distant past.
Let us have a brief recap. The OPEC+ alliance (an informal coalition between Saudi-led OPEC and Russian-led non-OPEC oil-exporting nations) had a deal: a monitored cut in oil production (an estimated 2 percent of world production) to maintain crude prices in the global market. In March 2020, this agreement fell apart amidst the receding global demand due to the rampant spread of covid-19. The price support faded as the Saudis unilaterally decided to offer surplus crude supply at a discount. Saudi Arabia announced a 25 percent increase in production and supplied consignments at a roughly 10 percent discount. As the top global exporter of crude and oil products, Russia retaliated as the Russian ruble slipped more than 7 percent against the US dollar. This price war, lasting only a month, resulted in a global market fiasco – facilitating a 65 percent quarterly fall in crude prices. Today, a similar scenario is covertly shaping in the background as a persistent Russia continues to wreak havoc in Ukraine.
According to estimates from JP Morgan, 70 percent of Russian seaborne oil is struggling to find customers. And coincidently, some OPEC producers are again attempting to increase supply as crude benchmark tails the 14-year high of $140/barrel. The UAE and Iraq, both OPEC members, are reportedly motivated to bring about 800,000 barrels to the market without any official agreement. Even a successfully renegotiated Nuclear Deal with Iran could sufficiently increase global production to replace Russian oil. Such prospects could eventually force Russia to play below the belt – choke European gas supply, disrupt negotiations with Iran, and even flood the international market with cheap crude to deliberately make prices plummet.
The USA has banned oil imports from Russia, a symbolic rather than a strategically significant move. The USA is one of the world’s three largest oil producers. And crude imports from Russia amounted to only about 8 percent of US liquid fuel imports in 2021. It means that the USA can avoid disruptions in its energy supplies; Russia could swiftly compensate for the loss by supplying elsewhere. How is that possible? Well, Europe is the target market for the Russian energy sector. And none of the European countries have applied sanctions to Russian oil exports. Sure, Britain is vocally pledging to phase away from the Russian energy by the end of 2022. But the Russian oil (and gas) sector is still conspicuously barred from the punitive solidarity shown to Ukraine in the past two weeks. How economically (not to mention politically) fascinating!
Admittedly, Germany announced an unprecedented move to suspend the licensing of the Nord Stream 2 gas pipeline. We all expected German Chancellor Olaf Scholz to cling tightly to the usual neutral narrative. However, the reality is that Europe is still heavily dependent on the Russian oil and gas supply. Approximately 40 percent of EU gas and a quarter of its oil gets imported from Russia. Sure, the gas consumption is strictly seasonal – which might be the reason that inspired the bold decision to shelve the gas pipeline. Yet, Russia could still choke the gas (and oil) supply in retaliation.
According to estimates from JP Morgan, 70 percent of Russian seaborne oil is struggling to find customers. And coincidently, some OPEC producers are again attempting to increase supply as crude benchmark tails the 14-year high of $140/barrel. The UAE and Iraq, both OPEC members, are reportedly motivated to bring about 800,000 barrels to the market without any official agreement. Even a successfully renegotiated Nuclear Deal with Iran could sufficiently increase global production to replace Russian oil. Such prospects could eventually force Russia to play below the belt – choke European gas supply, disrupt negotiations with Iran, and even flood the international market with cheap crude to deliberately make prices plummet .
While the Nord Stream 1 pipeline is operating “at its full capacity,” according to Alexander Novak – Russian Deputy Prime Minister – just the prospect of supply disruptions from Russia rattled the European gas markets – at one point surging by 80%. The oil prices would estimably breach the $150/barrel mark by this summer. It is stark clear that Russia is sustaining heavy blows to its economy. And it is also apparent that a revival would be a colossal effort spanning years of reparation. However, merely the fear of ‘minor’ penalties is already reflecting in the European markets. I wonder how practical it is to assume that Russian retaliation would be tolerable to Europe? While the global political pundits are suspecting worse to come for Ukraine, I believe that worse is about to upend Europe. And the bloc is eerily shrugging off the imminent economic devastation – much like it downplayed the possibility of an invasion. Look how that turned out!
