Russia’s Ukraine invasion raises questions on energy policy
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Russia produces about 10 million barrels of oil a day. In recent years, it has supplied Europe with nearly 40 percent of its natural gas imports and more than a quarter of the oil it purchased from abroad. The country’s reliance on energy supplies, and fears of rising prices from disruptions in its exports, have made it difficult for other governments to ban one of its biggest industries.
As Russia’s attack on Ukraine, ordered by President Vladimir V. Putin, has exposed loopholes in the West’s energy security, some have been prompted in recent years by governments and investors to move funding away from fossil fuels and toward renewable energy sources. But the question has been raised.
Daniil Yergin has written several books on the relationship between geopolitics and oil. His debut, “The Prize: The Epic Quest for Oil, Money and Power”, won the Pulitzer Prize. His most recent, “The New Map: Energy, Climate, and the Clash of Nations,” shows the complex interrelationship of climate policy, national security, and energy.
Mr. Yergin, who is also vice president of financial data company IHS Markit, spoke to DealBook this week. The interview has been condensed and edited for clarity.
How do you relate Putin’s decision to invade Ukraine with what is happening in the energy markets?
It was a very rewarding time for Putin to move on. The oil market always goes through cycles, but it has gone through the most violent cycle I’ve ever studied – from negative prices less than two years ago to an incredibly tight market. Whether or not Putin calculated it, he chose a time when oil markets are really tight, gas markets are really tight, coal markets are really tight, and he is a big exporter of all three. So he is the beneficiary of it. This benefits him. So whatever the price of this horrific invasion Russia is paying, it is making a lot of money from the high price of oil.
It is worth noting that oil and gas were not directly approved [by European countries], And that’s because, you know, if they do, you’re really going to be killing Europe. I mean, it would partially stabilize Europe. That’s why this is such a difficult situation.
How do we get here?
I think people have forgotten about energy security. Since the US became an exporter with 60 percent of our oil imports, we didn’t think about it any more. What we’ve done lately is some short-sighted policies about investing. And the term I’m using is “pre-emptively low investment” in developing new resources. Demand for oil is still growing and is likely to increase for at least the rest of this decade and perhaps early next decade.
How much of this is a function of moving to green energy?
There is a paper written from a macroeconomic perspective by Jean Pisani-Ferry, an economist, which states that it will be quite disruptive if you try and move too fast. And he wrote that in August, and it looked like an interesting paper. And then this energy crisis started in Europe last October before Putin put the brakes on gas deliveries.
Last month, Germany closed its last two nuclear power plants. And so that meant importing more gas.
Do you think this is a policy issue, or are investors taking the lead in moving away from more oil supplies?
It was a combination of policies, but of course also the power of market investors. First, returns were quite poor for many years. We have had two oil price drops since 2014.
What about the role of government? Both the Federal Reserve and the SEC are pushing companies for more disclosures about carbon emissions.
Russia’s attack on Ukraine and the global economy
A growing concern. Russia’s attack on Ukraine could cause a huge jump in energy and food prices and could scare off investors. The economic damage from supply disruptions and economic sanctions will be severe in some countries and industries and go unnoticed in others.
We’ll see what comes out of the SEC and Fed turning financial regulators into environmental regulators. I think oil investing is going to be tough. I have heard some oil company leaders say: “Maybe we have to become a private company. We can’t be a public company and still be in this business.” I don’t think any of them are doing that, but they are feeling those pressures. So it’s a mix of investors and the government.
What can the US do to reduce Western dependence on Russian oil?
The US has clearly indicated that it is looking to Saudi Arabia to increase production. There is not much spare capacity in the world to produce additional oil. Saudi Arabia and the United Arab Emirates have a large share of it. Of course there is going to be some very intense diplomacy now between Washington and Saudi Arabia.
So what are your expectations in terms of price over the next six months?
The first major study I did when we started our company was called “The Future of Oil Prices: The Perils of Prediction.” Having said that, I think we’ve been in a tight market for a while now. Prices would have been higher anyway, and now they will be higher because of the disruption. The question is whether these higher prices will in turn discourage consumption.
Things that could change: First, the US-Iranian deal, which would bring more than a million barrels of oil back to the market. Second, US production this year will likely increase by about a million barrels a day. These are two big things on the supply side. On the demand side, the cure for higher prices is higher prices. What will it do to ask? This is another step in inflation as these costs flow to consumers and companies.
What can be learned from this about energy policy and investing in renewable energy?
Wind and solar don’t directly replace oil, unless you have a lot of electric cars. It encourages trying to accelerate the energy transition, although you may not have that much money to do it. On the other hand, I think it also means that you have to think about the near- and medium-term energy security as well as your climate goals. And if you don’t pay attention to energy security, you’re going to have more disruption and more disturbance, which will make it harder to achieve your climate goals.
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