Putin’s energy war has flopped (so far)
When Russia invaded Ukraine a year ago, President Vladimir Putin had a lot more in his war plan than tanks and missiles. Putin also planned an energy war in parallel with his military war on the ground in Ukraine.
Putin’s military war has gone badly, his army decimated after failing to seize Ukraine, as planned. Putin’s energy war has failed, too. Neither war is over, but the many nations now allied against Russia have done a remarkable job blunting Putin’s most potent economic weapon.
Putin clearly anticipated sanctions against his country in response to the 2022 invasion. He also thought he could counter those sanctions using Russian energy, which Europe in particular was dependent on. Russia is the world’s third-largest oil and natural gas producer, and at the time of the invasion, it was Europe’s top source of gas, needed to produce electricity.
At first, Putin’s energy war worked as planned. Sanctions imposed by the United States and other nations largely exempted Russian energy, to protect consumers from price spikes. But the unpredictable nature of those sanctions, plus instability caused by the war itself, generated a “fear premium” in energy markets that pushed prices up. Oil prices spiked from about $90 before the invasion to nearly $125 four months later.
U.S. gasoline prices hit $5 per gallon last June, damaging President Biden’s popularity and making inflation a bigger everyday concern for Americans than the war in Ukraine. Natural gas prices rose by far more than oil and gasoline. Russia started reducing gas flows to Europe last June, then completely shut the main gas pipeline to Europe in September.
By late August, European natural gas prices were four times higher than before the war. Wintertime rationing seemed likely, along with a recession caused by sporadic business shutdowns and painful energy inflation. Gas prices surged in the United States as well, though not by as much in Europe, given that gas is not as transportable as oil, generating regional price differences.
Soaring energy prices were exactly the kind of pain Putin planned for nations opposing his war. His hope was that high energy prices among Ukraine’s allies would wreck their economies, undermining public support for sanctions and for aid to Ukraine.
The full-blown energy crisis Putin tried to create never materialized, however. Prices tell the story. Oil, gasoline and natural gas prices are now lower than they were before Putin invaded, as the chart above shows. Russia is still a crucial source of energy, but the nations it tried to bring to heel have reconfigured their energy supply chains with speed and skill nobody foresaw a year ago.
“The last year may be remembered as the twilight for Russian energy leverage,” Richard Morningstar, founding chairman of the Atlantic Council Global Energy Center, wrote in a January report. “Moscow’s energy strategy is not working, and its ability to wield energy chaos as a geopolitical weapon is waning.”
Several concerted actions by Ukraine’s allies parried Putin’s energy offensive. In the United States, President Biden released an unprecedented amount of oil from the strategic reserve, with other countries releasing smaller amounts. Though not huge relative to total oil supply, those releases seem to have reassured markets and brought price relief at the margins.
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Putin himself blinked. He could have slowed or stopped Russian oil sales, which would undoubtedly have sent prices soaring, given that Russia produces about 10% of the world’s oil. But he never did. Oil sales are Russia’s biggest source of revenue, and Putin desperately needs that funding to pay for a war that is far costlier than he anticipated. Russian oil production has actually remained stable for most of the past year, which is helping Putin keep the war going but also keeping global prices under control.
Europe also dramatically revamped its natural-gas supply chains, with the portion of gas coming from Russia dropping from 40% to less than 10%. And much of that gas goes to Turkey and Balkan nations not fully participating in sanctions. Gas shipped on tankers from the United States and Qatar backfilled much of the supply lost from Russia. Some European power plants also switched from gas to coal, which boosted carbon emissions, but is also likely temporary.
The United States and other large nations have also developed novel ways to begin sanctioning Russian energy while keeping supplies on the market and prices low. In December, a U.S.-led group of large nations imposed a price cap of $60 per barrel on Russian oil. Barrels from Russia generally sell for less than that, since global prices have been around $80 and the market demands a discount for the risk and complexity of purchasing from Russia. But this “buyers cartel” can lower the price and pinch Russia harder.
On February 5, another set of price caps went into effect for Russian petroleum products such as diesel fuel. Putin has vowed to withhold oil from any buyer participating in the price-cap regime, but so far nothing has changed.
Putin may still have some ammunition in reserve. “Given that Washington has strongly signaled an aversion to higher oil prices, and has gone to quite extraordinary lengths to keep a lid on them, there remains an elevated risk that Putin will seek to exploit this pain point in 2023,” Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in the January Atlantic Council report. “We may be entering a particularly precarious phase in the conflict. Putin may endeavor to demonstrate that he is not a spent force.”
One concern is Russian sabotage of energy facilities in regions where it has some influence, similar to the mysterious explosions that ruptured two undersea gas pipelines running from Russia to Germany last September. Russia has links to mercenary groups in oil-producing nations such as Iraq, Algeria, and Libya, and direct involvement in some energy facilities operated by former Soviet Republics. Some analysts think a surprise slowdown in production from two fields in Kazakhstan last April may have been a dress rehearsal for future Russian sabotage.
Russia has also announced an oil production cut of 500,000 barrels per day—about 4.5% of its total output—starting in March. Since other tactics haven’t worked, Putin may be testing new ways to gain an edge, similar to Russian troops trying to adapt and survive on Ukraine’s bloody battlefields. What Putin hasn’t accounted for is the ability of his adversaries to adapt, too.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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