Why Russia is winning the energy war

March 29, 2022 By    

Trader’s Corner, a weekly partnership with Cost Management Solutions, analyzes propane supply and pricing trends. This week, Mark Rachal, director of research and publications, examines how propane could help Europe separate from Russia’s energy supply.

Over the last three Trader’s Corners, we have covered topics on how the U.S. might respond in helping Europe wean itself off of Russian energy. In the forefront of these discussions is the horrific war in Ukraine. A sovereign nation has been invaded and innocent children, women and men are being slaughtered by weapons they have no ability to defend themselves against.

But, in the background, there is another war taking place that has facilitated what is happening in Ukraine. Russia won this war well before the first of its tanks rolled onto Ukrainian soil. Because Russia won the energy war, it will likely accomplish most of what it set out to achieve by the invasion of Ukraine.

To be sure, Russia underestimated the courage and determination of the Ukrainian people. Its ground war in Ukraine will cost much more than it expected in terms of lost troops and military equipment. These are losses that do not concern Russian President Vladimir Putin. What does concern him has been the overall lack of effectiveness by his military, which is an embarrassment to him and a dagger to Russian pride. What Putin did not underestimate is the unwillingness and inability of Western nations to ultimately stop him from achieving his aims. Part of the West’s ineffectiveness has been its dependency on Russian energy.

Despite heroic actions, the Ukrainian people and government of Ukraine are being forced to negotiate for their survival literally with a gun pointed at them and no hope of other nations becoming involved militarily. NATO, and especially the U.S., have made it very clear that the Ukrainian people will fight for their sovereignty and their lives alone in the trenches.

NATO member Turkey, which also has close ties to Russia, is involved in the negotiations between Russia and Ukraine. It is reporting that, so far, the two sides have agreed on four key points:

  1. Ukraine will not join NATO, remaining a neutral country.
  2. Ukraine will partially demilitarize.
  3. Ukraine will depend partly on Russia for its security.
  4. The Russian language will be the official public language of Ukraine.

Concerning the fate of Crimea, the area that Russia took in a prior invasion, and the Donbas, which is controlled by pro-Russian forces, the Ukrainian government is insisting that a vote by the Ukrainian people would be necessary to decide if those regions become independent of Ukraine. We assume that would mean the people in those regions would be voting on independence and perhaps annexation into Russia. One would expect Russia to control those elections, so the outcome is likely a foregone conclusion. All that is required of Russia is to pull its military out of Ukraine. Perhaps the only thing that Putin does not achieve is the overthrow of the current Ukrainian government and installing a puppet regime friendly with Russia.

Our first Trader’s Corner on this subject addressed the U.S.’ ability to wean itself off of Russian crude and refined products. We showed how that was very doable. After that article, the U.S. government announced it was putting an embargo on all of the above. What we have seen since is an increase in U.S. refinery throughput to help offset the drop in refined fuels from Russia. The U.S. has been in negotiations with other nations, specifically Iran, Venezuela and Saudi Arabia, to obtain heavy crude. In the end, Russian supply will likely be replaced by more heavy crude from Canada.

The second Trader’s Corner was concerned with the U.S.’ ability to replace Russian energy to Europe. We pointed out the challenges of replacing both crude and natural gas supplies. While the U.S. government has said it is going to ship more LNG to Europe, the details on how that might be done are very limited. What timelines we have seen for doing so have been long – as we expected they would have to be. The bottleneck is LNG export capacity. There was a move to eliminate a restriction that U.S. LNG could only go to nations that have a “most-favored nation” trading status with the U.S. That may allow more European countries to get U.S. LNG, but that does nothing to address the lack of export capacity currently available. As we stated, the typical timeline has been 10 years for the design, permitting and construction of an LNG project. Until we see the approval of more facilities and significant reduction in that timeline, we are not confident the U.S. can have much impact in helping Europe replace Russian natural gas, which is Europe’s greatest vulnerability.

Last week, the European Union (EU) conceded it had lost the energy war. It is so dependent on Russian sources of energy, it cannot put an embargo on them. What was even more disturbing, considering the situation in Ukraine, was that some members publicly stated they would not act on energy initiatives that would make their economic situation more difficult. There is not an action that would punish Russia that would not make energy more expensive for the EU. These statements telegraph that many EU nations will make little effort to end dependency on Russian energy once the fighting in Ukraine is over.

Russia won the energy war by using a multipronged strategy. It built relationships in Europe. For example, a former chancellor of Germany sits on the boards of two Russian energy companies. It facilitated building pipelines from its production areas to its European neighbors, making its supply cheaper than waterborne shipments. It created an environment that encouraged energy majors from all around the world to invest in projects in Russia. While these majors were facing more hostile regulatory and public acceptance environments at home, they were welcomed with open arms in Russia. Many of these companies just walked away from billions of dollars of investments in Russia in protest of the Russian invasion of Ukraine. Russian oligarchs will be happy to accept the gifts.

Russia has nurtured strong relationships with both net exporters and net importers of energy. It has forged extremely close ties with China, the largest energy importer in the world. It entered into a trade agreement with China just before the invasion of Ukraine that made any energy cargoes loaded in Russian ports bound for China immediately Chinese property, essentially preventing the West from stopping these movements without being in direct conflict with China. China and India are rivals. Russia built a strong relationship with India as well, so much so that India made it well known it would continue buying Russian energy supplies even as the war in Ukraine raged. India fears as much as anything else taking actions that would encourage a stronger relationship between Russia and China.

It built strong relationships with Middle Eastern producers. OPEC, Russia and other former USSR nations formed a group called OPEC+ that worked together to stabilize crude prices. Middle Eastern nations have shown they are much more eager to appease and support Russia than supply Europe since the Ukrainian war began. Russia and China have strong ties with Venezuela as well as large producer nations in Central Asia.

There have been reports that Russia backed many efforts in the West to turn public perception against hydrocarbon production. While we can’t independently verify these efforts, we can conclude that such efforts would be consistent with waging an energy war. If a nation such as Russia wants to control energy, a logical component of making other nations dependent on your energy would be to discourage them from producing their own.

The simple fact is the West has been outmaneuvered by Russia and China, and it has lost the energy war. As it stands currently, it will take years, if not decades, for the West to overcome this defeat. In the meantime, the West will continue to finance Putin’s war against Ukraine and likely succumb to further expansion by autocratic nations in the future. Perhaps the West can still salvage the situation. But the challenges are now comparable, at least to a degree, to what the Allies had to accomplish in World War II when they sacrificed much blood and treasure to liberate nations that were initially subjugated by Axis aggression. It will be a long and costly fight, and the outcome is far from certain.

Call Cost Management Solutions today for more information about how client services can enhance your business at 888-441-3338 or drop us an email at info@propanecost.com.

Featured homepage image: tttuna/E+/Getty Images

Comments are currently closed.