Russia’s Failed Energy War Accelerates Clean Transition

April 6, 2023

With some aid from an unsettlingly mild winter, Europe has weathered Russia’s fossil fuel war.

Paul Krugman in New York Times:

In some ways, though, Russia’s most important defeat has come not on the battlefield but on the economic front. I said that Russia has launched four great offensives; the fourth was the attempt to blackmail European democracies into dropping their support for Ukraine by cutting off their supplies of natural gas.

There were reasons to be concerned about this attempt to weaponize energy supplies. While the Russian invasion of Ukraine initially disrupted markets for several commodities — Russia is a major oil producer, and both Russia and Ukraine were major agricultural exporters before the war — natural gas seemed like an especially serious pressure point. Why? Because it isn’t really traded on a global market. The cheapest way to ship gas is via pipelines, and it wasn’t obvious how Europe would replace Russian gas if the supply were cut off.

So many people, myself included, worried about the effects of a de facto Russian gas embargo. Would it cause a European recession? Would hard times in Europe undermine willingness to keep aiding Ukraine?

Well, the big story — a story that hasn’t received much play in the news media, because it’s hard to report on things that didn’thappen — is that Europe has weathered the loss of Russian supplies remarkably well. Euro area unemployment hasn’t gone up at all; inflation did surge, but European governments have managed, through a combination of price controls and financial aid, to limit (but not eliminate) the amount of personal hardship created by high gas prices.

And Europe has managed to keep functioning despite the cutoff of most Russian gas. Partly this reflects a turn to other sources of gas, including liquefied natural gas shipped from the United States; partly it reflects conservation efforts that have reduced demand. Some of it reflects a temporary return to coal-fired electricity generation; much of it reflects the fact that Europe already gets a large share of its energy from renewables.

And yes, it was an unusually warm winter, which also helped. But the bottom line, as a report from the European Council on Foreign Relations puts it, is that “Moscow failed in its effort to blackmail E.U. member states through withholding gas.” Indeed, Europe has stepped up its military aid to Ukraine, notably by sending main battle tanks that may help the coming Ukrainian counteroffensive.

So what can we learn from the failure of Russia’s energy offensive?

First, Russia looks more than ever like a Potemkin superpower, with little behind its impressive facade. Its much vaunted military is far less effective than advertised; now its role as an energy supplier is proving much harder to weaponize than many imagined.

Second, democracies are showing, as they have many times in the past, that they are much tougher, much harder to intimidate, than they look.

Finally, modern economies are far more flexible, far more able to cope with change, than some vested interests would have us believe.

For as long as I can remember, fossil-fuel lobbyists and their political supporters have insisted that any attempt to reduce greenhouse gas emissions would be disastrous for jobs and economic growth. But what we’re seeing now is Europe making an energy transition under the worst possible circumstances — sudden, unexpected and drastic — and handling it pretty well. This suggests that a gradual, planned green energy transition would be far easier than pessimists imagine.

Economist (paywall):

Meanwhile, the world’s existing production capacity of both oil and gas is already close to being fully used. Russia cannot easily redirect gas exports; its oil rigs, lacking people and parts, may soon produce less than they do now. Although energy-hungry countries have been busy signing long-term deals to import lng, which will force them to import the fossil fuel for several more decades, volumes remain modest. Hydrocarbon firms are enjoying juicy profits, but investment in new projects is falling. Such investment remains well below levels of a decade ago, and a dollar seems to go less far nowadays: capital expenditure per barrel of output, a measure of exploration and production costs, has risen by 30% since 2017. Sustained demand amid slowly rising, perhaps even falling, supply should keep prices of both oil and gas high. 

Lofty prices have already led consumers and firms to reduce their reliance on fossil fuels. Last year the world economy became 2% less energy-intensive—measured by the amount of energy it uses to produce one unit of gdp—its fastest rate of improvement in a decade. Efforts to consume less are most apparent in Europe, which in recent months has been assisted by unusually mild temperatures. According to McKinsey, a consultancy, warm weather and greater energy efficiency mean the continent has used 6-8% less electricity this winter than in the previous one. And all over the world, capital is being mobilised on a vast scale to make the economy more frugal. Last year governments, households and firms together spent $560bn on energy efficiency. This money mainly went on two technologies: electric vehicles and heat pumps. Sales of the former almost doubled in both 2021 and 2022. 

Smoke signals

But efficiency can only make so much difference. People are also looking to alternative sources of energy, especially in Europe. From December 2021 to October 2022 contract prices for the continent’s wind and solar photovoltaic projects were on average 77% below wholesale power prices. At €257 per megawatt-hour (mwh), the average price in Germany in December, a typical solar plant takes less than three years to become profitable, against 11 years at €50 per mwh, the average spot price between 2000 and 2022. Globally, installations of rooftop solar panels, which households and firms use to trim bills, rose by half last year. A record 128gw of onshore-wind projects also broke ground, marking a 35% increase from the year before.


One Response to “Russia’s Failed Energy War Accelerates Clean Transition”

  1. rhymeswithgoalie Says:

    As bad as the oil and gas players are in the rest of the world, I expect Russia to be a leader in uncapped, unflared gas wells as demand collapses. (Right now I think they’re just flaring some big active wells because of the local toxicity of CH4, rather than any concern for GHG emissions.)

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: