Consequences of the Ukraine conflict on the global energy market

The conquest of the Great Russian Plain by non-native people, the Eastern Slavs, can be considered the beginning of the economic history of Russia. At this time, trade with European people was the priority of Russian economic civilization.
11 September 2023
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Abbas Maleki

The conquest of the Great Russian Plain by non-native people, the Eastern Slavs, can be considered the beginning of the economic history of Russia. At this time, trade with European people was the priority of Russian economic civilization. The second economic civilization was also based on agriculture, and after that, trade relations with the Byzantine Empire were gradually formed. The Romanovs also chose a combination of Western-oriented Westernism under the head of Peter the Great and anti-Western Westernism under the head of Nicholas I, Alexander III, and Nicholas II. Despite the initial idealistic view, the Soviet Union was faced with several domestic contradictions of economic, political, and identity dimensions; in the end, Gorbachev's political and economic reforms revealed these contradictions and the dissolution of the Soviet Union, and then Yeltsin's shock therapy program with the incompatibility between the old and new institutions led to the worsening of the situation and the rise of oligarchy. In his Ph.D. thesis at St. Petersburg University entitled Natural Resources and Raw Materials and Development Strategies for the Russian Economy, Putin emphasized the most important advantage of Russia, i.e., crude oil and natural gas resources, and he considered the way to return Russia's greatness to use these two sources to gain power. In this connection, since Putin's rise to the sphere of Russian politics, the energy sector has been the focus of the attention of the Russian government. Over time, Russia has 12 large pipelines for the export of oil and gas. The capacity of oil and gas pipelines is 6.46 million barrels per day and 408 billion cubic meters, respectively. Statistics show that Russia used only 60% of the export capacity of its oil and gas pipelines before the outbreak of the COVID-19 disease, i.e., 2020. The following figure shows the main Russian oil and gas export pipelines.

The Ukraine war is rooted in Putin's energetic views. Failure to pay attention to energy export and earning income caused the decline of Russia's economic situation after the collapse. Paying attention to the energy industry and recovering large companies from the hands of the oligarchs strengthened Putin's power. The non-cooperation of Ukraine in the development of Russian pipelines and the non-payment of debts due to excessive gas consumption (committed to Europe) by Ukraine led to the interruption of natural gas flow in four pipelines left over from the Soviet Union and, finally, the occupation of the Crimean peninsula in 2014. The joint cooperation between Putin and Merkel made it possible for Russia to reduce its energy export dependence on Ukraine by completing the Nord Stream 1 pipeline while accessing financial resources from gas exports. Putin and Merkel's agreement to build the second branch of the Nord Stream pipeline, this time financed by the Russians, was opposed by the United States and sanctioned by the manufacturing companies. Nord Stream 2 was completed when Merkel's government reached the end of the line, and the new German government refused to implement agreements with Russia, leaving the $11 billion pipeline for Russia. This is one of the reasons for Putin's decision to attack Ukraine.

In a year since the Russian attack on Ukraine, the situation of the energy market has faced the biggest changes. Crude oil prices in March 2020 for Brent and West Texas Intermediate were $18 and $37, respectively. After February 24, 2022, and the occupation of eastern Ukraine by Russian forces, Brent reached $124 per barrel and West Texas Intermediate $119 per barrel in March 2022, respectively. This big gap in the price of an industrial product shows the deep effect of Russia's aggression on Ukraine. The continuation of this war continues to overshadow the energy market. The main effects of the Ukraine war are as follows:

  1. This event has led consumers of energy carriers to explore new technologies and further develop renewable energies. New methods in the field of access to energy carriers, such as how to produce hydrogen or use a fuel cell, are among the new technologies. Also, the cost of generation from solar and wind power plants continues to decline. The latest report of the Lazard Institute shows that the production of one-kilowatt hour of electricity from clean energy is equal to the production of the same amount in the fossil power plant sector with a thermal cycle.
  2. Another effect of this war is that the consumption of renewable energy, such as natural gas and coal, will increase at least until 2025. With Russia's attack, European countries had no choice but to revive coal-fired power plants. On the other hand, they were forced to declare that natural gas is a clean energy carrier, while in 2017, they strictly prohibited investing in natural gas.
  3. Increasing focus on energy security due to concerns about energy shortages and vulnerability to geopolitical events made countries and regions in the world try to reduce their dependence on imported energy and instead consume more of their production energy. This process will continue.
  4. The change in the composition of energy sources is one of the important effects of the war between Russia and Ukraine on the global energy system. Also, more motivation has been created to improve energy productivity, and on the other hand, it challenges the need to diversify the energy portfolio.
  5. Increasing food and energy prices have contributed to a sharp decrease in global economic growth. The direct economic effect of this price shock is going to be with the world for the next few years. In addition, war slows down the progress of world trade because different countries and regions of the world focus on the domestic economy and reduce the risk of exposure to international shocks. This slowdown in the pace of globalization will lead to a slight decrease in average economic growth over the next 30 years.
  6. Prioritizing the energy produced inside each country, which is caused by increasing energy security concerns, reduces the import of oil and natural gas. This effect will be particularly evident in China and India, which currently import between 75 and 85% of the oil they use and between 40 and 55% of their natural gas.
  7. The future of Russia's energy resources is uncertain. Various outlook scenarios of specialized energy organizations predict a continuous decrease in Russian fossil fuel exports. In the short term, this case shows the effect of voluntary and mandatory sanctions on Russian energy exports. In addition, it is assumed that the sanctions affecting Russia's access to foreign investments and technology will be gradually decreased. On the other hand, considering the European Union's dependence on natural gas imports from Russia before Russia's military attack on Ukraine and its strong dependence on oil and gas imports from other countries, the effect of increasing energy security concerns in a united Europe will also be evident.
  8. The European Union, China, and India together accounted for about 45% of global oil imports and about 50% of natural gas imports in 2021. In all three regions, increasing concerns about energy security led to a permanent decrease in the share of imported oil and gas in primary energy. In 2035, the total oil and natural gas imports of the mentioned regions will be more than 10% less than in 2022. The limited scope of increasing the domestic production of oil and natural gas in these countries and regions means that the decrease in the share of imported oil and gas in primary energy is compensated by the consumption of local renewable energy.

Meanwhile, what can the Islamic Republic of Iran do?

Without a doubt, Asia is the first and most consuming market for crude oil and natural gas. Among Asian countries, three countries, China, India, and Japan, need more energy than other countries. It is suggested:

  1. The pipeline of four branches of natural gas from Central Asia to China is operating. The design and implementation of another pipeline from the north of Iran to China is one of China's demands. In this case, China will not need to rely on the Strait of Malacca.
  2. Asalouye Iranshahr natural gas pipeline (IGAT-7) is one of the most successful projects in the country's energy sector. Line studies have been done from Iranshahr to the Pakistan border and from there to Karachi. Action to continue this line in Pakistan is in the direction of Iran's national interests.
  3. Studies of the Islamic gas pipeline have been carried out from the south of Iran to Europe through Iraq, Syria, and the Mediterranean Sea. This line can place Iran among the direct gas suppliers of Europe.
  4. Due to the termination of the Iran gas export contract to Turkey, it is appropriate that the necessary negotiations for the extension of this contract should start now.
  5. Iran has been unsuccessful in producing liquefied natural gas (LNG). Now, due to the improvement of compression technologies, such as ships that convert natural gas into compressed gas, as well as the wide demand for this energy carrier in East Asia, the price of one million BTUs of gas on the coast of Japan is eight times that of gas in the Persian Gulf, immediate action should be taken in this regard.
  6. The import of crude oil and natural gas from the countries of Central Asia and the Caucasus and its consumption in the north of the country and their swap in the south are still accompanied by a suitable rate of return on investment.

Abbas Maleki, Professor of Energy Policy, Sharif University of Technology

(The opinions expressed are those of the authors and do not purport to reflect the opinions or views of the IPIS)

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