Lessons for global energy markets

The Ukrainian people are bearing the brunt of the war with Russia, but the war also has severe consequences for world energy markets.

The European Union relies on Russian natural gas, and this dependence has forced the United States and Europe to keep up with their otherwise severe economic sanctions against Russia.

On Wednesday, White House spokesman Jen Psaki said the Biden administration was considering energy sanctions against Russia, but that was a very strong call amid high oil prices in both the United States and Europe.

The Russo-Ukrainian war is one key to global energy markets and another is climate change. As Monday’s long-awaited report by the UN Intergovernmental Panel on Climate Change urgently and desperately made clear, global warming is an urgent threat to human well-being.

“Almost half of humanity lives in the danger zone – now. Many ecosystems are at a point of no return – now, “UN Secretary-General Antonio Guterres said on Monday. “Uncontrolled carbon pollution is forcing the world’s most vulnerable to march to extinction – now.”

Fluctuating this gap with climate change, while surviving the war between Russia and Ukraine, generates a new framework for understanding global energy markets.

The nation’s national energy policy is a cornerstone of its national security policy.

In the case of Europe, “it was shockingly irresponsible to entrust gas storage to Gazprom,” said Steve Chikala of the National Bureau of Economic Research. Cicala focuses on the economics of regulation, and in particular on environmental and energy policy. Gazprom is the Russian energy giant, which is majority owned by the state.

In the future, the EU “must move at the maximum possible speed to get rid of Russian gas,” Chikala said.

This does not mean that energy independence is the benchmark.

“The goal is security,” said David Victor, a professor of public policy at UC San Diego. “And security is not the same thing as independence.”

Energy independence means relying on national or local energy sources. But even there, flexibility is limited if one of these sources is cut off or depleted. A well-functioning global market is a better solution.

“Security comes only from diversity and variety,” he said.

For Europe, the problem is over-dependence on Russian natural gas pipelines. The EU meets about 10% of its domestic demand for natural gas, and everything else is imported, making it the world’s largest importer of natural gas, according to the EU’s Directorate-General for Energy. Natural gas imported into the EU comes mainly from Russia (41%), Norway (24%) and Algeria (11%).

In the short term, the European Union is seeking to increase its imports of liquefied natural gas by tankers from the United States and Qatar, Victor said.

Europe “is actually increasing important imports from different countries. And having those imports is an option for them that improves security,” Victor said.

The EU is reducing its dependence on coal to meet its 2050 climate target of carbon neutrality and reduce emissions by at least 55% by 2030.

In 2020, according to the latest available data for the year, 32% of energy in the EU comes from oil and petroleum products, according to Eurostat, the European Union’s statistical office. About 25% of the EU’s energy comes from natural gas, 11% from solid fossil fuels, 13% from nuclear energy and 18% from renewable sources.

The focus on building renewable energy is already significant, according to Aaron Practinho, head of energy systems economics at the E.ON Energy Research Center at RWTH Aachen University in Germany.

“I don’t think the EU should be to blame for not increasing renewables faster,” Pracinho told CNBC. “Take Germany: In just about 20 years, the share of renewable energy sources in electricity consumption has increased by a factor of about 10 from about 5% to 50%. At the same time, electricity prices for end-users have doubled mainly due to subsidies for renewables. “

A draft government policy received by Reuters on Monday found that German leaders are seeking to accelerate their transition to renewables, aiming to meet all their electricity needs with supplies from renewable sources by 2035.

The transition to the EU energy network will require physical improvements and international coordination.

It will also require government intervention, a pill that many current political regimes are reluctant to take, according to Sir David King, a former UK climate change officer who now chairs the University of Cambridge’s Climate Recovery Center.

“Some governments, and the current British government is one of them, don’t like regulatory behavior. We want to deregulate everything and allow the private sector to work for free. You can’t make this transition without regulatory behavior,” King said.

Lobbying by existing energy suppliers may contribute to the reluctance to regulate the energy industry, King said.

“The United States has the largest lobby system for the fossil fuel industry in the world,” King told CNBC. “The strength of the lobbying system in the United States has affected other countries as well. So I think the incumbent president is afraid of being excluded from business.”

Another problem: Politicians do not give priority to energy policy because many of their constituents have more pressing concerns, said Benjamin K. Sovakul, a professor of energy policy at the University of Sussex School of Business.

“While energy costs generally seem high, they are still a small percentage of total household spending per month,” Sovakul told CNBC. “So it’s not as important a priority as mortgages, university fees or paying for cars. We spend thousands of pounds or euros on them every year, but only hundreds of pounds or euros on energy.

Public opinion polls and polls have found that voters prioritize issues such as immigration, the Covid-19 response, military spending, health care and the war in Ukraine over climate policy and energy, according to Sovacool.

“And no politician wants to be seen raising energy prices in the short term by investing in low-carbon alternatives, even if it pays off in the long run or benefits society later,” Sovakul said.

Nuclear power generation does not emit greenhouse gases, but some components are concerned about the potential for accidents and the lack of a permanent repository for radioactive nuclear waste.

In a sense, the war between Russia and Ukraine will be like a Rorschach test for nuclear energy, Victor told CNBC, as Ukraine has 15 nuclear reactors that the International Atomic Energy Agency (IAEA) is monitoring during the conflict.

“People who are worried about nuclear energy will see in all the unrest around the Ukrainian nuclear complex, in particular more reasons to worry about nuclear energy,” Victor said. “And people who see nuclear energy as part of an overall strategy to tackle emissions and a way that also reduces dependence on foreign suppliers will see in this the logic of keeping nuclear power plants open and building new nuclear power plants in Europe. “

Attitudes about nuclear energy are often difficult to change, and the current situation is no exception, according to Victor. (He sees nuclear energy as an important part of decarbonization.)

Germany received about 25% of its electricity from nuclear energy by March 2011, according to the World Nuclear Association. The German government then passed a law phasing out nuclear power following the Fukushima accident in Japan.

High gas prices and a lack of energy must now motivate Germany to restart its significant nuclear fuel portfolio. “Even in the short term, it would help quell the shock,” Chicala told CNBC.

“Decisions to withdraw nuclear weapons were short-sighted and not enough attention was paid to how the shortage will be compensated. But that would be true even without the risk of cutting off supplies from Russia, “he said.

But Germany’s move is not necessarily leading. The Czech Republic, France, Poland and the United Kingdom are pursuing new nuclear reactors, according to John Kotek of the Institute of Nuclear Energy. As Russia falls into diplomatic favor, it gives US nuclear companies a foothold for European customers, Kotek said.

Russia is “one of the strongest competitors for nuclear exports because it will offer aggressive financial packages,” Kotek said. “Russia is indeed excluding itself from many of the opportunities that will exist in the free world in the coming decades because it is simply proving to be an unreliable partner.