The economic consequences of Russia invading Ukraine are being felt worldwide as the price of commodities surged last week. Brent Crude hit $105 a barrel and WTI Crude briefly surpassed $100 a barrel. It is the first time prices per barrel have risen this much since 2014, when Russia annexed Crimea.
“Russia treacherously attacked our state in the morning, as Nazi Germany did in the Second World War years,” tweeted Ukrainian President Zelensky on 24 February. “As of today, our countries are on different sides of world history.”
Oil prices had been rising in parallel to the build up of Russian troops on the Ukrainian border. The Russian invasion lifted an already escalating price to new heights.
World leaders have responded with increasingly far-reaching sanctions, designed to hurt Russia’s economy and weaken support from those around Putin.
Last week, Germany announced it had put the now fully completed Nord Stream 2 pipeline on hold. The US announced sanctions on major Russian banks, wealthy Russians with links to Putin and technology imports to the country. UK Prime Minister Boris Johnson announced similar measures, targeting major Russian banks, companies and individuals.
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On Thursday night, European leaders agreed a second set of sanctions for Russia – just 24 hours after the first – including an export ban on specialised refinery technologies from the EU.
“Our export ban will hit the oil by making it impossible for Russia to upgrade its oil refineries [to meet EU 'Euro 6' air pollution standards for vehicles], which gave Russia export revenues of €24bn in 2019," said European Commission President Ursula von der Leyen at the post-summit press conference.
The EU has a "very clear competitive edge" in these technologies and it will "not be easy” for Russia to find substitutes, “at least in the short and medium term”, an EU official said on Friday.
In an ironic twist given EU climate and environment policy, one journalist noted the EU will not prevent Russian refineries from operating but from reducing their pollutant emissions.
Some nations were in favour of more severe sanctions, including on the energy sector. But the refining technology export ban is the only measure that can strike Russia's oil and gas sector without risking harm to European consumers, a great many of whom rely on Russian gas to keep their homes warm, the official said.
Over the weekend, Western leaders went further. On 26 February, US, Canadian and European leaders announced another series of sanctions that target Russia's central bank and will bar some Russian banks from the international payment system SWIFT – a measure major European economies like Germany and Italy had originally opposed due to fears of disrupting energy trading. Crucially, payments for gas and oil deliveries will still be possible under the new sanctions. Analysts predict they will drive down the price of Russian crude while likely sending the rest of the market even higher.
The question is whether Putin will care about the sanctions, especially while they continue to exempt Russia's most important source of revenue. He has taken little notice of them previously.
Financial pressure is also coming from other directions however. On Sunday, oil major BP announced it will divest its 20% stake in Russian oil firm Rosneft and Norway's $1.3trn sovereign wealth fund said it will divest from Russia. Norwegian energy major Equinor announced its exit from Russia on Monday.
What is next for energy oil prices?
Analysts warn that global energy prices will likely continue to rise, especially if Russia decides to limit its oil and gas exports in response to the sanctions. According to analysis from Eurostat and GlobalData, Energy Monitor's parent company, Russian imports made up 45% of EU energy imports in the first ten months of 2021. While being cut off from Russian pipelines could be managed in the short term, it could have big consequences in the long term without alternatives.
“Getting through half a winter without Russian imports but with some gas in storage is one thing – running the European economy for several years without Russian gas is a different challenge,” said Simone Tagliapietra, a senior fellow at economic think tank Bruegel in an earlier interview with Energy Monitor. "While there is more time to prepare, there are also much higher volumes to displace.”
With the high prices, companies may be tempted to cash in on some of their upstream assets. They could redeploy the cash towards the energy transition, return it to investors, or double down on fossil fuel investments, says Thom Allen, an oil, gas and mining analyst at think tank Carbon Tracker. He warns investors against committing to long-term fossil fuel projects.
“Oil prices have historically been cyclical, and this is likely to remain the case as the energy transition unfolds,” Allen says. “Over-investment based on short-term price signals could amplify this cyclicity; we see prices falling significantly in the long term as demand for oil and gas falls.”
In its Managing Peak Oil report, Carbon Tracker warns that oil and gas companies risk over-investing in their traditional businesses. Thom Allen emphasises they could “waste some $530bn of capex this decade by investing for the long term based on short-term price signals”.
The oil industry has already begun to increase expenditure on fossil fuels since the oil price rice in 2021 as “their investment strategies are almost always reactive", says Paul Spedding, research advisor at Carbon Tracker, formerly of HSBC Bank, where he covered oil and gas, "but I think they will pause before changing anything as things stand. Industry lead times are measured in years for most projects, so they are likely to wait and see how things develop.”
Spedding does, however, predict a possible increase in investment in short-term US shale projects. “The US still has some surplus LNG export capacity and shale lead times are measured in months rather than years. Europe is already short of gas due to Russia’s behaviour.”
The long-term picture is quite different: “Governments will increasingly conclude that the solution to energy security concerns is to reduce reliance on [fossil fuel] imports and accelerate the shift to renewables," Allen sums up. "The answer to high oil and gas prices is not to become more reliant on fossil fuels."