Russian energy embargo 6/6

The longer-term and wider outcomes of the looming energy trade war.

< < < Part 5 What the energy trade war might look like?

The longer-term and wider outcomes of the looming energy trade war.

I am convinced, that the energy trade war is almost inevitable, as both potential adversaries, Russia and Europe want it and may see political and strategic value in it. I think that in the short term it may create a lot of hardship for the world as a whole – the crisis promises to be the largest scale ever, dwarfing 1973, 1979, and 1991, which all led to deep global recessions. This time it will be exacerbated by the legacy of COVID, and the economic burdens it created and fixed with an equivalent of sticky tape, and which is still not over. It will be accompanied by the food cost and availability crisis, which will almost certainly create socio-political problems in the developing countries leading to new wars, revolutions, and waves of refugees.

In the short run, Russia will not feel much difference from the additional effects of volumetrically reduced energy trade and may even continue to receive a comparable amount of revenues, which will be difficult to spend. Russia will have enough resources to continue the war, and an immediate lack of resources will not be the decisive factor that would influence the end of hostilities.

In the longer run existing and new sanctions, embargoes and boycotts would deprive Russia of important technologies, spare parts, intermediate goods, and raw materials will lead to cascading shortages, idling of modern equipment, and return to the older practices in many spheres of life that can be supported with only locally sourced materials and equipment.

Energy transition, which was making a hype in the last couple of years, will receive a new spin. On one hand, the decarbonization agenda will take the back seat, as every energy source would count, and switching off coal will become an unaffordable luxury. On the other hand, energy security will become an important subject and alternative energy sources, including wind and solar, will get a strong new push forward, both from market signals as energy prices will be going up, and from increased government support. Nuclear energy will also become more popular, but the field is currently dominated by the Chinese and Russian players, and would the impulse be strong enough to resuscitate the almost derelict Western nuclear power stations construction industry, is to be seen. Now we may be more certain that the fossil energy era is coming to an end and the ensuing events may speed up its sunset by a decade or so

Traditional energy players are also facing a difficult choice. They were discouraged by the society, markets, and authorities from making new investments in fossil fuels at least for the last 5 years. Some of the project development capacity may already be lost, these are aging industries with little appeal to the young talent, and the existing workforce defecting to other fields. Suddenly, there is a strong call for additional energy supplies to replace Russia and additional developments. On the other hand, it is clear, that a concerted push toward energy transition will make at least some of the new investments stranded, and this understanding will hinder the investment and creation of the new non-Russian capacity. The governments might have to come up with schemes that would guarantee a decent return on these investments or set up mechanisms for buyout and retirement of this capacity created in the state of emergency.

For the world as a whole, this would create an unneeded expenditure at the scale of hundreds of billions of dollars, which could be spent elsewhere, and this is yet another part of the cost of war.

And ironically, this is yet another problem that Russia created for itself when it started the war – when the war would be over when Russia would come to a settlement and re-emerge from isolation, it will face the world speeding towards a low-carbon economy much faster than was assumed a few months ago, and the world with substantial new gas, oil, and coal capacity with little space for the Russian energy goods in the market with a brought forward closure date.