The onset of the 2022 Russian-Ukraine war was met with an immediate market response; equity markets nosedived, and futures markets moved to price in the heightened global uncertainty. Global energy markets responded in a similar fashion – with oil prices skyrocketing past $110 a barrel and coal jumping to over $290/tonne.
Russia is an energy powerhouse by any measure – it is the world’s largest exporter of gas, accounting for about 45% of the European Union’s (EU) imports in 2021. It also holds the world’s largest reserves of natural gas. Russia is also the world’s 3rd largest producer of oil and is a major exporter of coal. Therefore, a war involving Russia and the sanctions that followed inextricably has broad implications for global energy and has the potential to reshape how the world uses energy. Could the Russia-Ukraine war spark a structural shift towards renewable energy on a global scale? What evidence do we have to support this theory? And who are the current big winners and losers in the energy game?
Economic wars
At first glance, it appears Russia has the upper hand, controlling a sizeable chunk of continental Europe’s energy supply. In the lead up to the conflict, Russia had already received the benefit of high gas, oil, and coal prices, boosting the country’s revenues and trade surplus. From an economic standpoint, a move by Russia to cease supplying fossil fuels, say, gas, to continental Europe would result in even higher gas prices and revenues.
However, such fears are likely to be unfounded as energy experts believe any attempt to cut off European gas supplies for monetary or military gain is unlikely to succeed in the longer term. The short-term economic boosts to Russia and other energy exporters will be countered by the acceleration of the ongoing shift away from fossil fuels toward renewable energy.
Lessons of the past
“The stone age came to an end not because the world ran out of stones.”
The above quote was made in reference to the oil supply shocks of the 1970s where a similar situation unfolded, wars in the Middle East and oil supply constraints during a period of high oil prices. The 1970s' oil supply shocks became a catalyst for change; the drive to lower overall dependence on oil brought about more fuel-efficient vehicles and increased use of nuclear power in electricity generation.
The parallels between the 1970s' oil shocks and today’s Russia-Ukraine conflict are difficult to ignore. The writing is on the wall, with the EU and other nations adopting round after round of sanctions against Russia which include prohibitions on importing solid fossil fuels.
The question is how long will it take for Europe to substitute Russian energy for alternative sources? Will all fuel sources (gas, oil, coal) be readily substitutable?
The consensus is that gas will be challenging to replace, particularly for Central- and Eastern-European states more dependent on Russian gas for heating. For these states, a shift toward using electricity (and vis-à-vis nuclear power) to heat homes is expected to be slower than for other European nations due to the investment required in terms of time and financial resources to establish nuclear power plants.
In contrast, Russian coal is likely the easiest to replace due to the mobility of coal supply. Here, Australia stands to benefit as the world’s largest exporter of coal. A few Australian coal companies with export capacity are reportedly in discussions to commence exporting coal to the EU.
Replacing Russian oil may also prove to be problematic. While spare capacity in the Middle East might be able to replace Russian oil supplies, the bottlenecks are likely to be at the refinery front, as European refineries are optimised for heavier grades of Russian crude oil and are far less efficient at refining the lighter Middle East oil. Like the nuclear option, any changes to refineries will be expensive and will take time.
Delays on the horizon
The pace of the shift towards renewable energy is likely to be slowed for a few reasons:
Firstly, any renewable-energy infrastructure projects are likely to encounter higher prices for key building materials, as well as higher transportation costs due to higher oil prices. The cost pressures arrive on the back of the COVID-19 pandemic, which already created delays for renewable energy projects due to supply chain disruption.
Second, a global push towards developing renewable/nuclear energy infrastructure would increase demand for the respective talents and expertise required for such projects. Given a limited global talent pool in these industries, any competition for talent will drive up salaries and wages and overall project costs. Staff shortages and delayed projects may well be the end result of a global infrastructure push.
The war and Australia
Australia’s coal industry stands to benefit economically from the Russian sanctions. On the household front, however, the effects of the war are being felt at the hip pocket by every Australian, with higher oil and commodity prices causing higher inflation. The cost of electricity is a source of concern for many Australians, with most Australian states and territories experiencing an effective doubling of wholesale electricity prices compared to the prior year. Queensland, with the highest dependency on coal-fired power stations, experienced the sharpest electricity price hikes, in excess of 250 per cent. Another unintended consequence of higher energy prices could be higher future interest rates, as the RBA is expected to rein in inflation.
Summary
War brings about undesirable consequences - any loss of human life is a tragedy, as is the scale of devastation on a national level. Without ignoring the enormity of these consequences ultimately Russia’s war on Ukraine will bring about positive environmental changes as the world embraces renewable/nuclear energy in its bid to reduce its reliance on fossil fuels. However, the pace of such a transition is unclear with a number of strong headwinds expected with large-scale energy infrastructure projects. In the shorter term, resources such as coal are readily replaced, whereas other resources requiring a large infrastructure investment such as oil, and in particular, gas will be significantly more difficult to replace.
Comentários