Russia’s invasion of Ukraine raises energy policy questions

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Russia produces about 10 million barrels of oil per day. In recent years, it has supplied Europe with almost 40% of its natural gas imports and more than a quarter of the oil it buys abroad. Dependence on the country’s energy supplies and fears that a disruption in its exports could drive up prices have made it difficult for other governments to impose sanctions on one of its biggest industries.

As Russia’s attack on Ukraine, ordered by President Vladimir V. Putin, highlights flaws in the West’s energy security, some have questioned the will of governments and investors in recent times. years of moving money from fossil fuels to renewable energy sources.

Daniel Yergin has written several books on the link between geopolitics and oil. His first, “The Prize: The Epic Quest for Oil, Money & Power”, won a Pulitzer Prize. His most recent, “The New Map: Energy, Climate, and the Clash of Nations,” captures the complex interrelationship between climate policy, national security, and energy.

Yergin, who is also a vice president at financial data firm IHS Markit, spoke to DealBook this week. The interview has been condensed and edited for clarity.

How do you relate Putin’s decision to invade Ukraine to what is happening in the energy markets?

It was a very advantageous time for Putin to move. The oil market always goes through cycles, but it just went through the most violent cycle I have ever studied – from negative prices less than two years ago to an incredibly tight market. Whether Putin calculated this or not, he picked a time when oil markets are really tight, gas markets are really tight, coal markets are really tight, and he is a big exporter of all three. He therefore benefits from it. This gives him leverage. So whatever this terrible invasion costs Russia, it makes a lot of money from the rising price of oil.

It should be noted that oil and gas were not directly sanctioned [by European countries]. And that’s because, you know, if they did that, you would really hit Europe. I mean, it would partially immobilize Europe. That’s why it’s such a difficult situation.

How did we come here?

I think people just forgot about energy security. When the United States went from importing 60% of our oil to exporting, we forgot about it. What we have had recently are somewhat short-sighted investment policies. And the term I use is “preventive underinvestment” in the development of new resources. Oil demand continues to rise and is expected to rise at least for the rest of this decade and possibly into the next decade.

To what extent is this a function of the move towards greener energy?

There is an article written by an economist, Jean Pisani-Ferry, from a macroeconomic point of view, which says that if you try to go too fast, it is going to be quite disruptive. And he wrote this in August, and it seemed like an interesting article. And then this energy crisis in Europe started before Putin halted gas deliveries last October.

It was also last month that Germany shut down its last two nuclear power plants. And so that meant importing more gas.

Do you think this is a political issue or are investors taking the initiative to walk away from increased oil supply?

It was a combination of policies, but certainly also the power of market investors. First of all, the yields for several years have been quite low. We have had two oil price crashes since 2014.

What about the role of government? The Federal Reserve and the SEC are pushing companies to disclose more of their carbon emissions.

We will see what comes out of the SEC and the Fed transforming financial regulators into environmental regulators as well. I think investing in oil is going to be more difficult. I’ve heard oil company executives say, “Maybe we need to go private. We cannot be a public company and still be in this business. I don’t think any of them do that, but they feel those pressures. So it’s a mixture of investors and government.

What can the United States do to reduce Western dependence on Russian oil?

The United States has made it clear that it will look to Saudi Arabia for increased production. There is not much spare capacity in the world for additional oil production to come at this time. Saudi Arabia and the United Arab Emirates have most of it. There is no doubt going to be quite intense diplomacy now between Washington and Saudi Arabia.

So what are your price expectations over the next six months?

The first major study I did when we started our business is called “The Future of Oil Prices: The Perils of Prophecy”. That said, I think we’ve been in a tight market for some time. Prices would have been high anyway, and now they will be because of the disruption. The question is whether these higher prices will in turn discourage consumption.

Things that could change: First, a US-Iran deal, which would bring over a million barrels of oil back to market. Second, US production this year will likely increase by around one million barrels per day. Those are the two big things on the supply side. On the demand side, the cure for high prices is high prices. What will he do to demand? This is a further increase in inflation, as these costs are passed on to consumers and businesses.

What can we learn about how to approach energy policy and investments in renewable energy?

Wind and solar are not direct replacements for oil, unless you have a lot of electric cars. It encourages trying to accelerate the energy transition, even if you may not have as much money to do so. On the other hand, I think it also means that you have to think about short and medium term energy security, as well as your climate goals. And if you don’t pay attention to energy security, you’re going to have more disruption and more turbulence, which will make it harder to achieve your climate goals.

What do you think? What impact will the Russian invasion of Ukraine have on energy policy? Let us know: [email protected]

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