Soon as the EU announced its 6th tranche of sanctions that will cut off 90% of Russian oil shipments to European countries, crude oil prices nosed up to $114 a barrel. Industry predictions range from Brent crude rising to $123 in the next 10-14 days to a JPMorgan warning that the price spiral may touch $185 a barrel if there is a ‘complete shutdown’ of Russian supply.
High energy prices are driving inflation and anger. In the US,over the last year car owners are paying 45% more for filing up their tanks, while UK consumers have been shelling out 54% more for gas to heat their homes. Even in India, where the government has controlled gasoline prices by lowering excise duty, consumers have faced a 30% rise in pump prices over the last 2 years. The world seems to have sleep-walked its way into an energy crisis not seen since the 1970s. The impact has been worsened with the sanctions imposed on Russia. The country is the world’s largest oil and natural gas exporter, and a major coal supplier too; and any disruption of such a large volume is bound to take a toll on both prices and supply.
Investments dry up
Even before the Ukraine war, disruption of supplies and high oil prices had become the order of the day. Now there will be shortages, queues at pumps and blackouts. The crippling shortage of fuel in Sri Lanka is just a curtain-raiser. The turmoil, experts say, is mainly the result of lower upstream investments in energy generation as the world stands on the crossroads of the demand for clean energy versus coal and other fossil fuels still making up the bulk of energy generation.
According to the International Energy Forum (IEF), investment in the oil and gas sector stood at just $341 billion in 2021, which is 23% below the pre-Covid level of $525 billion and well below the recent peak in 2014 of $700 billion. As the demand to reduce greenhouse gas emissions ratchets up, there is increasing uncertainty on policies being adopted by countries towards the traditional fuel industries. In addition, penalties for environmental degradation have been mounting. These have increased risks and made investors shy away from the fossil fuel sectors.
And while oil and coal have been red-flagged, alternative energy sources like wind and solar have not developed fast enough to cater to rising demand. Germany for instance is in the process of closing down fully functional nuclear power plants even as it struggles to meet the oil and gas shortage after the Ukraine sanctions. The world has walked into a energy crisis created by under-investment and demand-supply disruption. “We were heading towards a crisis anyway. Putin just brought us there faster and sharper,” Bob McNally, President of the consulting firm Rapidan Energy Group, was quoted as saying.
Handling the crisis
India has softened the blow by not joining the sanctions and cleverly sourcing large volumes of discounted Russian crude. India imported 840,645 barrels per day (bpd) of Russian Urals Light in May, up from 388,666 bpd in April and 136,774 bpd in May last year, Kpler Research data showed.June imports are projected at 1.05 million bpd, which implies imports from Russia will account up to 25% of India’s total import, compared to just 2-3% sourced from Russia before the Ukraine war.
Some estimates say Russia is offering India discounts of up to $40 a barrel. Conversely, the western alliance will not look too kindly to these windfall gains made by India from the sanctions imposed against Russia. In fact, India may face sanctions when exporting refined products.
The current worldwide energy crisis may in the short run lead to increasing investment in development of fossil fuels, and away from the environmental goals highlighted recently at Climate Change conferences. The target, endorsed by most nations, is to restrict global warming to 1.5 deg C above pre-industrial revolution levels, and to bring down emissions to net-zero levels by 2050.
Dr Fatih Birol, Executive Director of the International Energy Agency (IEA) estimates the high oil and gas prices today could help generate global net income in 2022 of nearly $2 trillion higher than in 2021 and two-and-a-half-times the average of the past 5 years. He thus hopes “if the global oil and gas industry were to invest this additional income in low emissions fuels, such as hydrogen and biofuels, it would fund all of the investment needed in these fuels for the remainder of this decade.”
On the surface this sounds like a prescription for suicide for legacy oil companies. However, for those with long-term vision, the current energy crisis makes the necessity of developing renewable sources even more urgent. Corporates in the business of energy can pioneer the changeover, like the electric vehicle (EV) revolution being driven from the stables of the gasoline guzzlers. Or, the legacy companies have to stand aside and die, and let someone else do it.
Rising fuel prices and inflation
High energy prices are driving inflation and anger. In the US,over the last year car owners are paying 45% more for filing oil tanks, while UK consumers are paying 54% more for gas $40 barrel
Russia is offering India discounts on crude oil. India imported 840,645 barrels per day of Russian Urals Light in May