Will the Russian invasion accelerate peak oil? News and Research

It was 1973 when a war between Israel and a coalition of Arab states led Saudi Arabia and other oil producers to impose an embargo on crude shipments to the United States.

Oil prices soared and the way the world consumed energy changed. France has built a fleet of nuclear power plants. Japan too; it has also started importing liquefied natural gas. In the United States, the use of petroleum for electricity generation has dropped and been replaced by coal and nuclear power.

Half a century later, another conflict is shaking global energy markets. The question now is how Russia’s invasion of Ukraine will change the global energy system.

The conflict is against radical changes in the energy sector. A growing number of countries and companies are committing to phasing out fossil fuels and adopting cleaner alternatives in the fight against climate change, even as the global use of fossil fuels continues to rise.

These competing trends make it difficult to predict the future of global energy systems. Russia’s attack on Ukraine further complicates the forecast.

Some analysts say the attack on Ukraine could hasten the world’s transition away from fossil fuels, especially in Europe. Others say the war could reveal just how dependent people are on fossil fuels.

But few wonder if the conflict will change the way the world uses energy.

“Shocks alter countries’ energy mixes,” said Nikos Tsafos, who tracks energy and geopolitics at the Center for Strategic and International Studies.

Europe was already considering a fundamental change in the continent’s energy system before the invasion was ordered by Russian President Vladimir Putin. The attack will likely hasten that transition, given Europe’s dependence on Russian gas, Tsafos said.

German Chancellor Olaf Scholz announced this week that the country would accelerate its timetable by 15 years to produce almost all of its electricity from renewables by 2035.

“Things that come out of the mouths of European leaders have never come out of the mouths of their leaders before,” Tsafos said. “There’s a different strategic will coming out of Europe, and if you don’t factor that into your model, I think you’re missing something.”

The impact could be felt globally as clean energy supply chains serving Europe expand to benefit other parts of the world.

“Whatever you thought demand for hydrocarbons was last week, it’s less now,” he said.

Yet others said there was little evidence to support the idea that the world will use the crisis to accelerate the move away from fossil fuels. The multiplication of climate promises in recent years is part of a context of explosion in the consumption of fossil fuels. The International Energy Agency estimates oil demand will exceed pre-pandemic levels this year.

Western sanctions and the withdrawal of oil companies from Russia will likely curb the growth of the oil industry under Putin, said Robert McNally, chairman of Rapidan Energy Group and a former economic adviser to the George W. Bush administration.

If global oil demand continues to climb in the future, it could leave the world scrambling to find additional barrels if Russia’s oil industry is diminished by the global response to its invasion, McNally said.

“I really think your stance on Russia depends on where you stand relative to peak oil demand,” said McNally, who thinks demand will increase. “I think we’re a year or two away from looking out the window and saying, ‘Oh my God, we’re not decarbonizing as fast as we need to. If I’m right about Russia’s inability to develop, that will be a very big problem.

There are important differences between the current crisis and that of 1973. On the one hand, the Organization of the Petroleum Exporting Countries will probably try to avoid large-scale supply disruptions – the exact opposite of the embargo that the ‘OPEC set up in 1973. Saudi Arabia already has plans to increase production by 1 million barrels per day by 2027.

“Saudi Arabia and the United Arab Emirates will be watching carefully to see if there will be any disruption in oil flows,” said Jim Krane, who studies oil markets at Rice University’s Baker Institute for Public Policy.

While the two countries are keen to avoid angering Russia after years of working together in OPEC+, “their first allegiance will be to keep oil markets well supplied and to replace any shortages coming from Russia,” he said. Krane said.

Russia produces 11 million barrels of oil per day, making it the world’s third largest producer behind the United States and Saudi Arabia. The country exports between 5 and 6 million barrels of crude per day, about half of which is destined for Europe. An additional 1.6 million barrels are being shipped to China, according to recent analysis by Amy Myers Jaffe, managing director of Tufts University’s Climate Policy Lab.

Venezuela’s and Iran’s past experiences offer insight into how crippling sanctions on Russia could affect the country’s oil industry. These countries were able to find buyers for their crude, but were forced to sell it at a discount.

While Western sanctions have so far evaded Russia’s energy sector, some of its crudes are trading at very favorable prices.

Jaffe said in an interview that she expects the crisis to prompt European countries to review their energy mix. But that change will take time, she said.

“In the short term, it’s difficult. There is only some flexibility to move away from path dependency of our existing infrastructure,” Jaffe said.

Thane Gustafson, a professor at Georgetown University who studies Russia and has written about its oil and gas sector, echoed that assessment.

When the Soviet Union fell, Western oil companies flocked to Russia. The country’s oil companies have now mastered hydraulic fracturing and horizontal drilling after years of working with companies like Halliburton and Schulmberger. This reduces the impact of departures like BP PLC, Exxon Mobil Corp. and Shell PLC, both of which announced this week that they would exit their Russian operations.

Most forecasts, meanwhile, show that oil demand will continue to rise this decade.

“The implication is that Russia will continue its hydrocarbon model for another decade,” Gustafson said.

The situation becomes more difficult for Russia in the 2030s, when decarbonization trends are expected to take hold and oil demand begins to level off and decline. The higher cost of producing a barrel of oil in Russia could leave the country out of a shrinking global oil market, he said.

The question for the world is whether the conflict in Ukraine is slowing the broader energy transition.

“There is such inertia in the energy structure. The energy transition is bound to be slow, even if there are unexpected surprises such as the incredible drop in the cost of renewable energy or the tremendous increase in global sales of electric vehicles,” Gustafson said. “The energy transition requires huge investments and the commitment of governments. This does not happen by chance. This requires a more or less functional global economy.

Reprinted from E&E News with permission from POLITICO, LLC. Copyright 2022. E&E News provides essential information for energy and environmental professionals.


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Felix J. Dixon