Image credit: Nikolai Ryutin / Nord Stream 2

COMMENTARY

by Ron Wallace
CGAI Fellow

February 25, 2022

Attaining greater energy efficiencies, with consequential reductions of emissions, is an unquestionably reasonable goal. However, Western governments obsessed with climate policies appear blind to the fundamental, strategic considerations of global energy: economics and security of supply. The developing divergence in approaches to energy production and transportation between East and West may be the single most worrying – and regrettably largely undebated – factor affecting global peace.  Think global powers are past energy wars?  Think again.

We have a remarkable spectre of a sitting president imploring the Russians and Saudis to produce more oil while simultaneously rejecting pipelines that promise the U.S. secure access to plentiful U.S. and Canadian supplies. The result is that in 2021 Russia became the number two supplier of oil to the U.S.

Policies aimed at curtailing North American supplies of vital fossil fuels have been paralleled by the upending of capital investments by major investment houses, sovereign wealth funds and insurance firms. What could possibly go wrong?

It is becoming abundantly clear that policies, like those in Germany, to achieve climate-driven objectives for net zero carbon emissions have delivered European energy security entirely into Russia’s hands. The SARS-CoV-2 pandemic subsequently caused an international public health crisis and sparked rising political and economic dislocations throughout the West. It has also served to distract attention from the potential consequences of attempting to achieve early transitions to renewable energy. Indications are that not only will net zero prove to be unattainable but worse, the transition could be anything but orderly.

Reuters reports that risks from potential geopolitical disruptions to oil supplies are coming at a time of tight inventories with international oil prices soaring from a “confluence of resilient demand, depleting inventories, thinning spare capacity, long investor positioning and lingering geopolitical tensions ...”  Not least among heightened geopolitical risks is the Russian invasion of Ukraine. So much for the chants of “oil is dead” heard from some Green politicians in May 2020.

Germany mistakenly assumed that aggressive renewable energy development could generate enough energy to make up for losses caused by its abandonment of nuclear power. Thus, Germany had to increase its imports of Russian natural gas as its consumers are subject to material increases in their energy costs.

Recently, NATO Secretary General Jens Stoltenberg called attention to the need for Europe to “diversify its sources of energy” this winter – coming at the peak of a political confrontation with Russia, the primary energy supplier to the EU. He also warned that a strong alliance among member nations is more “important than ever” amid mounting threats from China and Russia.

The reality is that Western retaliatory sanctions against Russia are in turn vulnerable to Russian energy retaliations that could further reduce European natural gas supplies or result in an international spike in oil prices. Indeed, even extraordinary efforts by the U.S. to augment natural gas supplies to the EU may not be sufficient to offset possible Russian reductions. Russian natural gas now accounts for almost 40 per cent of the EU’s gas supply.  Germany alone imports more than half its supply via the Russian state-owned company Gazprom, which also owns and operates several major European storage facilities. Europe annually consumes approximately 400 billion cubic metres of natural gas, of which more than 130 billion cubic metres originate from Russia. An estimated third of that supply crosses through Ukrainian pipelines.

Notwithstanding Russia’s denials that it has reduced annual gas deliveries to the EU, current shipments through Ukraine are substantially lower.

The Russians understand full well that retaliatory reductions in gas supplies to the EU would cause a devastating blow to the member states’ economies.

Recall that as recently as August 2021, President Joe Biden called on 23 oil-producing countries, led by Russia and Saudi Arabia, to increase oil production to combat rising U.S. fuel prices. 

Although its economy is highly dependent on oil and gas exports, Russia, as one of the world’s largest oil producers, could nevertheless reduce oil production and cause a spike in oil prices. Such a move could aggravate inflation in the global economy and increase gasoline prices for Americans – a tactic that could become a hot-button political issue in the U.S.

These are uncharted waters for the West as we sail with determination under the banners of climate and net zero. A major Russian retaliatory response to Western sanctions could have a material impact on the EU, the U.S. and the entire international energy sector. What started out as an international crusade to save the world from the existential threat of global warming has transmuted into a test for the West to confront looming military actions with or without economic sanctions. The laws of unintended consequences are reasserting themselves with a vengeance.  

Ron Wallace is an executive fellow of the Canadian Global Affairs Institute.  He retired as a permanent member of the National Energy Board in 2016.