To say Vladimir Putin threw a wrench into the global energy market this year is an understatement. Since Russia’s invasion of Ukraine in February, Putin’s favorite tool to erode support for the country has been energy. Russian energy companies have limited natural gas flows to Europe, one of Russia’s biggest energy customers, driving up prices and countries scrambling to identify replacements before winter sets in.
Meanwhile, Russian oil and gas revenues have skyrockets, as countries around the world have been willing to pay a premium for higher volumes of Russian oil and gas. Putin has been threatening Europe with this type of energy blackmail for years, but it was in 2022 that he became explicit.
There is a weakness in this strategy, however: the Russian economy has stayed afloat because the energy market is so globalized. Here’s how Putin’s aggression throughout 2022 could backfire dramatically.
Since the fall of the Soviet Union in the 1990s and the entry of countries like Russia and China into the global economy, energy has become a global commodity, and oil first and foremost, wrote Daniel Yergin, energy historian and vice president of S&P Global, in a the wall street journal editorial published on Monday. Major suppliers like Russia could rely on countries around the world to buy their oil, providing a stable source of revenue that has supported the country’s economy for years.
But the war in Ukraine and the West’s growing aversion to Russian energy imports could spell the end of the golden age of the international oil market, replaced by a much more fragmented and regionalized version where borders are defined by politics, Yergin argued.
“The European embargo on Russian oil, combined with the “ceiling” imposed by the United States on the price of Russian oil, marks the end of the world oil market. In its place is a siled market whose borders are shaped not only by economics and logistics, but also by geopolitical strategy,” he wrote.
Yergin argued that Russia could retaliate against new EU energy measures by cutting oil production and raising prices, which would further complicate matters for countries supporting Ukraine. But the fragmented and unpredictable nature of today’s oil market means the strategy could backfire on Putin in spectacular fashion.
“Moscow will strike back, hoping to cause disruption, panic and a breakdown in support for Ukraine. But Russia will face a tougher time than expected given current market conditions,” wrote Yergin.
Undo Putin’s Playbook
Facing a strong show of unity From Europe and the United States, Russia has sought to leverage its status as a major global energy supplier to Chew in support of Ukraine. But Western allies have so far managed to hold their ground.
Starting this month, the European Union, Russia largest historic energy customerhas begun phasing out Russian oil imports as the Group of Seven Nations approved a oil price cap for Russian imports. For Putin, the West’s growing independence from Russian energy and a more fragmented global oil market could end up significantly affecting the energy revenues Russia depends on, and it could all be his fault .
The oil price cap, which Yergin called “ingenious”, was set at $60 a barrel, designed to keep Russian oil in the market while limiting the country’s revenue from crude oil and petroleum products , including petrol and diesel, which during the first six months of the war had led to 102 billion euros ($108.6 billion) revenue for Russia.
Putin responded by calling for price capsstupidityand the Kremlin threatened to reduce russian oil production 5-7% early next year, driving up world prices and further depriving the West of energy. Earlier this month, officials even reported to the country would not sell oil countries that have accepted the price cap.
Since Western countries are no longer reliable customers, Russia seems to have considered the idea of a more regionalized oil market. In one maintenance With Saudi news channel Asharq last week, Russian Finance Minister Anton Siluanov said the country was “actively looking for new oil customers” in the wake of the Western oil price cap and that Russian oil companies “redirected their supplies from the West to the East, South, other countries.
But turning to a smaller oil market could hurt Russia’s revenue if it decides to cut output, which analysts have warned Putin could do in a bid to raise oil prices and hurt the economy. West.
“The Kremlin could cut exports despite the cap to try to raise global oil prices,” researchers from Bruegel, a Brussels-based think tank, wrote in a recent report. report. “Even if the reduction in exports harms Russia, the Kremlin may decide to do so as a sign of its willingness to suffer economic hardship.”
Return flashback
But if Russia decides to cut oil production or exports, it could do Putin more harm than good, Yergin argued, by raising prices enough to drive away current Russian oil buyers, including China and India.
“Sharp The oil cuts and consequent price hikes would be felt not only by European countries, but also by those important to Russia, namely India and China, which together received around 70% of exports. total crude oil shipments by sea in the country in December,” he wrote.
At the same time, the West may not feel the sting of high oil prices as much as Putin hopes. Even tap again into strategic oil reserves might “not be necessary,” Yergin said, as growing risks of a global recession in 2023 threaten to reduce the demand for oil.
Yergin said oil prices are volatile heading into 2023 in a maintenance with @CNBC last week, but added that a “true recession” could drive prices down. In October, the World Bank also warned a recession could have a negative effect on demand, warning that “the prospect of a global recession could lead to much lower oil consumption”.
“A production cut may well end up adding to the Kremlin’s long string of miscalculations,” Yergin wrote.
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