As an invasion unfolds in Eastern Europe, the reverberations from heavy shelling in Ukraine are rippling across the world. As Putin’s Russia invades the sovereign country and the gears of war begin to turn, there are more questions than answers about the impact that the tragedy unfolding in Ukraine will have on the rest of Europe and the global economy. For one thing, as a critical lynchpin for the European continent’s energy security, conflict in Russia and Ukraine will have far-reaching consequences for the average resident in the European Union.
Already, the attacks have caused oil prices to soar above $100 a barrel for the first time in nearly a decade, and have also sent renewable energy stocks surging as the liquefied natural gas market takes a major hit. Russia historically provides around 40% of the European Union’s natural gas supply and approximately 50% of Germany’s. All of which is to say that the Kremlin has considerable leverage in Europe, and this codependence has created a geopolitical nightmare as Russia has ignored the West’s pleas not to enter Ukraine.
since well before the Russian invasion of Ukraine, Europeans have been struggling under the weight of runaway energy bills. In Germany, some residents are now paying as much for one month of energy as they used to pay for an entire calendar year. In the United Kingdom, the government raised the price cap for energy bills by a whopping 54%.
And while the individual stories of financial strife, stress, and sacrifice are heartbreaking, the impact on local businesses and industries is nothing short of frightening. All kinds of small businesses across Europe have been forced to cease their operations as energy costs outweigh profits. Large industries have not been immune to sticker shock either. “Almost two-thirds of the 28,000 companies surveyed by the Association of German Chambers of Commerce and Industry this month rated energy prices as one of their biggest business risks,” the New York Times recently reported. “For those in the industrial sector, the figure was as high as 85 percent.”
As European politicians have tried to respond to the energy crisis, their efforts have amounted to a bandaid where a tourniquet is needed. “European governments have spent tens of billions of euros trying to shield consumers from record high energy prices, and themselves from voters' wrath, but the measures look set to fall short,” Reuters reported last month. For policymakers, the volatility of the energy markets has been nothing short of a nightmare, especially for poorer countries with little financial buffer. In Poland, for example, hospitals reliant on embattled public budgets are left wondering if they’ll be able to keep the lights on.
Critically, Europe’s reliance on Russian natural gas to keep the lights on and the economy running has weakened the continent’s bargaining power with Putin. As the West imposes sanctions on Russia in light of this week’s Ukrainian invasions, world leaders have been hesitant to hit Russia where it can hurt them the most – energy exports. "The sanctions that are being imposed today, as well that could be imposed in the near future, are not targeting and will not target oil and gas flows," an anonymous U.S. official was quoted by Reuters on Tuesday. "We would like the market to take note that there's no need for increasing the price at the moment."
Over the weekend, the world tightened its financial sanctions on Russia, cutting many Russian banks out of the international monetary system SWIFT. And while political leaders continue to drag their feet over energy-focused sanctions, for fear of making their own citizens vulnerable to soaring gas and electricity prices, the private sector has taken matters into its own hands. BP and Shell have both abandoned Russian projects, taking a stand on the side of Ukraine and making strong statements condemning Putin’s aggression. The way that the world has rallied to defend Ukraine has been stunning – even Switzerland has taken a side – and the manner in which the private sector has stepped up to do what the government would or could not do is history in the making. It must be pointed out, however, that for Shell and BP, higher oil prices are not necessarily a problem.
Ironically, the West and Russia have returned to a context of mutually assured destruction. This time it’s not nuclear holocaust, but economic devastation that’s on the line if energy sanctions are placed on Russian exports at the same time that energy supplies are already devastatingly tight. If Europe is unwilling to go further than placing sanctions on Russian banks and freezing oligarch’s assets, however, the Kremlin will have little reason not to continue a reign of terror in Ukraine.
By Haley Zaremba for Oilprice.com
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