Strategizing Hydrocarbon Demands During Russian-Ukraine War

<p style="text-align: justify;">Although crude oil prices were already rising even before the Russia-Ukraine war owing to post COVID-19 demands, including oils, Russia's invasion of Ukraine has left a deep economic, business, and even human impact disrupting supply chains, industries, lives, and livelihood.&nbsp;<br />&nbsp;&nbsp;<br />Russia is among the biggest producer of oil and natural gas globally. It produces an average of 10-11 million barrels of liquid fuel products per day and meets 25% of global needs. Europe is the main market for Russian hydrocarbons of oil and gas due to the lack of these energy sources in European countries, meaning that the European economy and, nonetheless Russian economy are interdependent on oil, gas, and hydrocarbon trade. The US also meets much of the hydrocarbon needs from Russia. &nbsp;<br />&nbsp;&nbsp;<br />Spearheaded by the ban of the USA in March of Russia's oil, gas, and hydrocarbons aftermath of Russia's invasion of Ukraine war in February, sooner UK followed the ban, and the European Union also said it would cut Russian oil imports by two-thirds. So the invasion of Ukraine by Russia and the series of banning from the USA and western countries sent the prices of oil and gas soaring worldwide.&nbsp;<br />&nbsp;&nbsp;<br />Otherwise, too, hydrocarbon output before the invasion of Ukraine by Russia had taken a hit due to low demand and low economic activities as a result of COVID-19. The Russian-Ukraine war further affected this output due to the economic sanctions and foreign policy directives issued by western countries and remains a crucial factor affecting the prices of oil and gas, including international relations and geopolitics, as well as the foreign policies of influential countries.</p><p style="text-align: justify;">The prices of these commodities and activities reliant on hydrocarbons, like stock exchanges in different markets, also sank, including exchanges in Germany and France, the FTSE 100 in London, and the dow jones and S&amp;P 500 in the US.&nbsp;<br />&nbsp;&nbsp;<br />With the war prolonging, several leaders of the European Union have rejected the idea of banning Russian hydrocarbon imports, like Germany, Sweden, and the Netherlands, exhorting their countries to remain dependent on Russia for energy. Countries facing the oil and gas crisis have been evolving strategies to counter the energy crisis and its escalating prices due to this war.&nbsp;</p><p style="text-align: justify;">The United States is tapping its strategic reserves to alleviate rising gasoline prices. Affecting countries are pressing oil and gas producers to increase their production output to meet the global demand. World economic forum members for economic cooperation and development are releasing 60 million barrels of oil, equivalent to 12 days of Russian exports, in the global market from their strategic reserves.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Conclusion</span></h2><p style="text-align: justify;">With the Russian-Ukraine war unabated, countries that are dependent on Russian hydrocarbon imports have also explored sourcing from other countries like India, which has increased its importing oil from Russia after the math war. Also the situation has also prompted them to re-examine their energy security policies and their respective energy mixes.&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="" target="_blank" rel="noopener">Rajeshwar Dhar</a></em></span><br />&nbsp;</p><p style="text-align: justify;">&nbsp;</p><h3 style="text-align: justify;"><span style="font-size: 18pt;">Frequently Asked Questions Answered by Rajeshwar Dhar</span> &nbsp;</h3><h3 style="text-align: justify;">&nbsp;</h3><h2 style="text-align: justify;"><span style="font-size: 12pt;">1. How will the Russia-Ukraine war crisis impact the energy industry? </span></h2><p style="text-align: justify;">The energy consumption worldwide is still heavily dependent on fossil fuels as the de-carbonization policies are still fragmented, and Russia and Ukraine have affected the world, especially the EU, adversely.</p><p style="text-align: justify;">In Europe, fossil fuels are 70% of the energy consumption (25% gas and 45% oil), and electricity which is 25% of the energy consumption, is largely generated from fossil fuel, as well; the EU is dependent on Russia for its imports of oil and coal, approx 25% of oil imports and approx 45% of coal imports. Also, the EU imports 90% of its needs from natural gas, which is 45% from Russia alone.</p><p style="text-align: justify;">This strong dependence on Russia is now forcing European countries to find alternatives to maintain the security of supply in the region like, the first, is the diversification of suppliers of gas (which EU has already announced a commitment to end the import of gas from Russia by 2027), the second, is the revival of some coal power plants, the third, is move to renewables energy network and systems and the fourth, is revival and extension to nuclear power generation.</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">2. How the war between Russia and Ukraine affects the global economy? </span></h2><p style="text-align: justify;">Prices of oil and gas from Russian exports are escalating, and the gas price has more than doubled, so the oil has increased appreciably.</p><p style="text-align: justify;">Globally, inflation will tend to be higher at current oil and gas levels, energy bills are likely to rise in the near future and hence will affect consumer incomes. The UK has already severely faced that.</p><p style="text-align: justify;">Supply chains are getting affected like prices of food staples are already on the rise, including metals, as Russia and Ukraine make 25-30% of global exports of wheat and sunflower seeds and have a significant share of copper, nickel, aluminium, palladium etc. which will have already started effecting industrial production due to supply delays and cost rise.&nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">3. What impact is the war in Ukraine having on world gas supplies? </span></h2><p style="text-align: justify;">Outset, Ukrainians have been drastically affected, yet the over-reliance of the west on Russian gas supplies has led to a scramble for alternative supplies.</p><p style="text-align: justify;">However, the constraints created by this market shock could provide the impetus to engage more constructively with low-carbon fuels, encourage investments into publicly traded oil majors with net-zero strategies, and surprisingly will meet the struggles of one billion million people without access or least access to electricity prior to the war.</p><p style="text-align: justify;">Natural gas flows from Russia into the EU, and the UK account for more than 35% of their supply and is the single dominant source of supply and demand for Russia. Russia's pipeline exports totaled $55 billion in 2022, and they now find a selection of consumers in India, China, Australia, Latin America, South Korea, and Africa selling these supplies at discounted rates, including LNG. But countries like the EU, UK and USA (to some extent) continue to suffer because of self-imposed bans. and supply cuts, too.</p><p style="text-align: justify;">Interesting to note how the Middle East and Saudi Arabia are making efforts to increase supplies with Iran supplies likely along with restoration of strained relations with suffering countries.&nbsp;</p><p style="text-align: justify;">&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 12pt;">4. What would happen if Russia cut off gas to Europe? </span></h2><p style="text-align: justify;">There could be many disastrous implications like:</p><ul style="text-align: justify;"><li>Spike in procurement costs, which would mean a 65-70% increase in power and gas bills from today's levels for families</li><li>There will not be enough gas around for industries, so gas-intensive companies working across chemicals, glass, paper, steel, and cement, will need to reduce production, therefore, causing job loss, too</li><li>With further falling flows, the affordability issue will be felt much more in winter; when the actual euro spent per family will go up, and winter is going to be really tough both for European families and the economy, which is closely linked to the global economy<br />&nbsp;&nbsp;<br />But, the historical record of wars vis-a-vis Russia shows that flow is not going to fall to zero and that flows remain at a sub-run rate, like between 30-50% below normal, but they don't go to zero.</li></ul><p style="text-align: justify;">&nbsp;</p><p style="text-align: justify;">&nbsp;</p>
KR Expert - Rajeshwar Dhar

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