Geopolitics of energy of the war in Ukraine & national responses to energy crisis
The article has been authored by Mehdi Hussain, assistant professor, Kirori Mal College, University of Delhi and PhD research scholar at Jawaharlal Nehru University.
The geopolitics of energy of the Russia-Ukraine war has exacerbated the energy problems globally risking the stability of the global markets, which have already been reeling through rising inflation and slowing growth. Particularly, the European Union countries and the U.S. have aligned to push back the Russian aggression by imposing various sanctions against it. In retaliation, Russia has suspended or restricted gas supply to the Euro region which has caused skyrocketing of gas prices in the region. It has led to dampening of energy supply from Russia at the time when the demand for global energy started to grow after the Covid-19 disruption. Further, the International Energy Agency (IEA) issued a 10-point plan to reduce the European Union’s reliance on Russian natural gas soon after the war broke out in February.
The volatility of the global markets is reflected in fluctuating crude oil prices, which presently hovers under $100 per barrel after touching its highest at Brent’s $123.21 per barrel in March, 2022 since 2008. Thus, the major central banks have been compelled to hike interest rates from time-to-time to control rising inflation but at the risk of economic slowdowns. Various experts have been warning of a global recession, especially in the United States (US) and Europe, by the end of 2022 or next year.
The war in Ukraine creates a vicious cycle of disruption of global supply chains, which in turn affects the prices of energy and essential commodities as well as their domestic pricing strategies and export policies. The Global Crisis Response Group’s (GCRG) second brief states that at 30 June, 2022 about 27 countries imposed 40 policy measures restricting food exports. Then, in the next month, 25 countries imposed 39 policy measures curbing over 8% of global trade.
Domestic responses to the challenge of increasing global energy prices can generally be seen, according to the OECD, in two ways, which are directed towards keeping energy affordable and regulating the cost of living. One, income support schemes of governments in the form of vouchers to households or firms, and two, the price support measures in the form of energy subsidies including tax cuts (like value added tax and fuel excise tax), reduced electricity prices or employee compensation. Both aim to protect consumers from the impact of rising energy prices. A combination of both forms of policy supports is seen although with variations in advanced and developing countries.
Price control measures fix energy prices below market prices. However, such measures can impact consumers of energy disproportionately in favour of high-income consumers. Moreover, the OECD believes that since these measures tend to maintain energy prices below market prices, they can discourage efforts towards efficient use of energy or even transition away from non-renewable fossil fuels. It can indirectly deter governments from switching to clean energy or achieving zero carbon emission.
Governments during the energy crisis may tend to shift businesses to a lower energy consumption mode. The member countries of the Asia Business Council (ABC) have introduced measures to reduce energy consumption, such as by using energy-efficient technologies, helping customers become more energy-efficient, and relying more heavily on renewable energy resources, according to the ABC Annual Survey 2022. Further, they also have initiated a reduction of their energy-related business risk through stockpiling additional fuel, hedging, and diversifying supplies. For the members of the Asia Business Council, energy security is the most upsetting concern caused by the war in Ukraine which is followed by inflation.
The national responses to rising energy prices is, however, not only about controlling the effects of inflation on day-to-day life of domestic consumers, but also aligning with long-term goals of energy security and carbon neutral emission. Amidst the energy crisis, optimism surfaces as the IEA considers energy crisis arising out of the war in Ukraine offers opportunities for countries to rush their efforts in building an efficient and clean energy. Fatih Birol, IEA chief believes that immediate response to the crisis should not resort to conventional fossil fuel-based energy system but strive for efficient use of the existing fossil fuels. Rather, countries should explore alternative energy sources in the form of shale oil and gas or methane gas which can be supplied to the market quickly. Besides, the existing LNG terminals require infrastructure upgradation for the use of ammonia or hydrogen inputs.
Birol argues that we are into a “new” global energy economy in which increasing investment in the energy sector, for instances, the $369 billion Inflation Reduction Act in the U.S., the $210 billion RePowerEU program in the EU, and the $146 billion Green Transformation programme in Japan indicates the enthusiasm of countries to seek for low-carbon energy sources. These investments in alternative energy sources can establish long-term energy security, industrial competitiveness and stability of energy price. The objective of these efforts should be developing low-carbon energy technologies which are decentralised, efficient and resilient to market shocks.
Moreover, conflicting geopolitical interests have already led to cutting off Iranian oil and gas from the global energy supply chain. For diversification of energy basket, Iran, with its rich oil and gas resources, can ease the woes of the energy crisis if the U.S. sanctions against Iran is withdrawn. On the one hand, the politicisation of energy of the west has brought perils to the global energy system. On the other, the Iranian President has given a call to “all oil and gas producers to work together to stabilise energy markets…and…bypass sanctions”. Europe is starved-off of energy but, nonetheless, the European Union is speculating about a ban on Russian oil. Attempts have been made to fill in the supply gap through an increased oil supply from the USA and the Middle East.
It is believed that the high energy cost is likely to persist in the near future. Thus, stabilisation of energy markets is essential through an inclusive energy system, which promotes fair and equitable rights to buy and sell energy commodities, in contrast to the present system influenced by resource nationalism or use of fossil fuels as a foreign policy leverage at the expense of disturbing global energy supply chains. In the globalised world, the global energy security should incorporate the ‘idea’ of an equitable distribution of conventional fossil fuels as well as alternative energies among countries of the North and the South. The focus should be on renewable technologies which are extremely essential for innovative and efficient means of production, distribution and consumption of energy.
The article has been authored by Mehdi Hussain, assistant professor, Kirori Mal College, University of Delhi and PhD research scholar at Jawaharlal Nehru University.