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Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…
A quick look at the numbers will show just how intertwined Europe and Russia are, and how the Russians have taken aim at the goose that lays the golden eggs. Here are the numbers, all rough and all changing fast. First, the world consumes about 97 million barrels a day(b/d) of oil. The Russians produce about 11 million b/d. They are big producers. They export about 8 million b/d. Now it gets pertinent to today’s crisis. The Russians send about 80% of their exports to Europe. And the Europeans get 40% of their oil from Russia. In other words, getting off Russian oil within five years, the European goal, requires finding roughly 6 million b/d of alternatives, whether other oil sources or non-oil energy or energy efficiency measures. This will take more than going to Saudi Arabia or the United Arab Emirates and asking them to be nice and turn up the “spigot” by, say, one or two million barrels a day.
That is one side. But consider the Russian side. Russia will bring in maybe $300 billion per year from oil exports at current prices. Russia’s entire gross domestic product before the invasion was only $1.5 trillion, making its economy smaller than that of Italy and about the same size as New York State’s. Near-term sanctions on Russian oil might have a brutal impact on Europe, but they will have a catastrophic one on Russia. In the long term, even if the war ends shortly and sanctions with it, Russia stands to lose its biggest export market. The Europeans (including the British who are not dependent on Russian oil) have already taken active steps to preserve nuclear power, build renewable generation, and develop hydrogen resources. The Ukraine war just accelerates those efforts while also eliminating Russia’s nuclear export potential, at least to Europe.
In the United States, politicians are taking a different tack. The Ukraine war shows, to them, the need to expand fossil fuel production and remove environmental safeguards that might slow that process. The nuclear lobbying effort in Europe has increased, as we see it, and we would expect the same to take place in the U.S. What we do not see, though, is a coherent national effort to finance nuclear power. This is surprising considering how much money the construction (and related) industry could make on a wholesale expansion of nuclear power. But that is another matter.
To sum up the economic consequences of this awful conflict, the Russians have taken steps to aggrieve their biggest energy commodity customers to the point that the customers intend to end the relationship. This jeopardizes one major source of income that maintains the Russian economy. This suicidal commercial move could upend the oil and gas markets. After this, the Russians will have to switch to China (or India) as their principal commodity purchaser. And with no other recourse, the Russian oil and natural gas sellers will take whatever a monopsonistic buyer offers to a temperamental supplier. Which is as little as possible. For Europe, the war will lead to a scramble for oil and gas supplies, a renewed effort in the renewable sector, and possibly a nuclear revival or at least a postponement of existing plant closures. We expect similar activity in the United States with more emphasis on fossil fuels production. But in reality, high fossil fuel prices make competitive energy sources like renewables and nuclear look more attractive in the long run. President Putin may have done more to endanger the future of the fossil fuel industry than anyone in its history. For many, the question will now become, “Who needs these ongoing geopolitical risks when we can make (at least some) of our own energy nearby?”
By Leonard S. Hyman and William I. Tilles
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