When Russia invaded Ukraine a year ago, President Vladimir Putin had much more in his war plan than tanks and missiles. Putin also planned an energy war in parallel with his military war on the ground in Ukraine.
Putin’s military war has gone badly, his army decimated after failing to conquer Ukraine as planned. Putin’s energy war has also failed. Neither war is over, but the many nations that have now joined forces against Russia have done a remarkable job of blunting Putin’s most powerful economic weapon.
Putin clearly expected sanctions against his country in response to the 2022 invasion. He also thought he could counter these sanctions with Russian energy, on which Europe in particular was dependent. Russia is the world’s third-largest producer of oil and natural gas, and at the time of the invasion it was Europe’s main source of gas needed to generate electricity.
Initially, Putin’s energy war worked as planned. Sanctions imposed by the United States and other nations have largely exempted Russian energy to protect consumers from price spikes. But the unpredictability of these sanctions and the instability created by the war itself created a “fear premium” in energy markets that drove up prices. Oil prices rose from around $90 before the invasion to nearly $125 four months later.
US gasoline prices hit $5 a gallon last June, hurting President Biden’s popularity and making inflation a bigger daily concern for Americans than the war in Ukraine. Natural gas prices rose far more than oil and gasoline. Russia began reducing gas flows to Europe last June and then completely shut down the main gas pipeline to Europe in September.
By the end of August, European natural gas prices were four times what they were before the war. Winter rationing seemed likely, along with a recession brought on by sporadic business closures and painful energy inflation. Gas prices also rose in the United States, although not as much in Europe as gas is not as transportable as oil, resulting in regional price differences.
The story goes on
Soaring energy prices were exactly the kind of pain Putin planned for nations that opposed his war. His hope was that high energy prices among Ukraine’s allies would ruin their economies and undermine public support for sanctions and aid to Ukraine.
However, the full-blown energy crisis that Putin wanted to bring about never materialized. The prices tell the story. Oil, gasoline and natural gas prices are now lower than before the Putin invasion, as shown in the chart below. Russia is still a crucial source of energy, but the nations it sought to control have reconfigured their energy supply chains with a speed and dexterity nobody could have foreseen a year ago.
“Last year may be remembered as a twilight for Russia’s energy lever,” wrote Richard Morningstar, founding chair of the Atlantic Council Global Energy Center, in a January report. “Moscow’s energy strategy is not working, and its ability to use energy chaos as a geopolitical weapon is waning.”
Several concerted actions by Ukraine’s allies parried Putin’s energy offensive. In the United States, President Biden has released an unprecedented amount of oil from the Strategic Reserve, while other countries have released smaller amounts. While not huge relative to total oil supply, these releases appear to have calmed markets and brought pricing relief to margins.
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TOPSHOT – Workers repair high-voltage power lines cut by recent rocket attacks near Odessa December 7, 2022 during the Russian invasion of Ukraine. – A fresh barrage of Russian strikes on December 5 left several Ukrainian cities without power, including the eastern city of Sumy and the southern city of Mykolaiv, officials said. In Odessa, the water utility said “there is no water supply anywhere,” and officials in downtown Kryvyi Rig said “parts of the city are cut off from electricity, several boiler and pumping stations are shut down.” (Photo by OLEKSANDR GIMANOV / AFP) ( Photo by OLEKSANDR GIMANOV / AFP via Getty Images)
Putin himself blinked. He could have slowed or halted Russian oil sales, which would no doubt have boosted prices since Russia produces about 10% of the world’s oil. But he never did. Oil sales are Russia’s biggest source of income, and Putin desperately needs those funds to pay for a war that’s costing far more than he anticipated. Russian oil production has remained stable for most of the past year, helping Putin keep the war going but also keeping global prices under control.
Europe has also fundamentally transformed its natural gas supply chains, with the gas share from Russia falling from 40% to less than 10%. And much of that gas goes to Turkey and the Balkan countries, which are not fully participating in the sanctions. Gas shipped on tankers from the United States and Qatar replenished much of the supply lost from Russia. Some European power plants also switched from gas to coal, which increased CO2 emissions but is also likely to be temporary.
The United States and other major nations have also devised new ways to begin sanctioning Russian energy while keeping market supplies and prices down. In December, a US-led group of major nations imposed a $60-per-barrel price cap on Russian oil. Kegs from Russia generally sell for less as global prices have hovered around $80 and the market demands a discount for the risk and complexity of buying in Russia. But this “buyer cartel” can lower the price and put more pressure on Russia.
On February 5, another set of price caps for Russian petroleum products, such as diesel fuel, came into effect. Putin has vowed to withhold oil from any buyer participating in the price cap regime, but so far nothing has changed.
Putin might still have some ammunition in reserve. “Given that Washington has clearly signaled an aversion to higher oil prices and has made extraordinary efforts to contain them, there remains an increased risk that Putin will seek to exploit this pain point in 2023,” says Helima Croft, head of global commodities strategy at RBC Capital Markets, wrote in the January Atlantic Council report. “We could be entering a particularly vulnerable phase of the conflict. Putin may try to demonstrate that he is not a spent force.”
One cause for concern is Russian sabotage of power plants in regions where it has some influence, similar to the mysterious explosions that ruptured two undersea gas pipelines from Russia to Germany last September. Russia has ties to mercenary groups in oil-producing countries like Iraq, Algeria and Libya, and is directly involved in some power plants run by former Soviet republics. Some analysts believe a surprise slowdown in production from two fields in Kazakhstan last April could have been a dress rehearsal for future Russian sabotage.
Russia has also announced a cut in oil production of 500,000 barrels per day – about 4.5% of its total production – from March. Since other tactics have not worked, Putin may be testing new ways to gain an advantage, much like Russian troops try to adapt and survive on Ukraine’s bloody battlefields. What Putin also failed to take into account is the adaptability of his opponents.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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