Russia’s Oil Power Gone Forever?

The International Energy Agency forecast is gloomy for Putin and company.

YahooNews/Fortune (“Russia’s oil power ‘will never return,’ the IEA says. ‘The rupture has come with a speed that few imagined possible’“):

Even as Russian missiles pound Ukraine, shattering about a third of Ukraine’s electricity grid and leaving its cities and towns in ruins, President Vladimir Putin has already lost the war in one crucial respect: Russia’s huge clout in global energy supplies—which it built up over decades—is shrinking drastically, probably forever.

That’s the assessment of the International Energy Agency, the Paris-based agency comprising the world’s biggest producing and consuming nations, in its yearly World Energy Outlook, out on Thursday.

“The rupture has come with a speed that few imagined possible,” the organization says in its 524-page report, which lays out three different scenarios for the decades ahead, depending on whether major countries stick to their green-energy commitments. “Russian fossil fuel exports [will] never return in any of the scenarios … to the levels seen in 2021,” it says.

Instead, Russian oil and gas revenues will drop by more than half, from $75 billion last year to less than $30 billion in 2030. And as Europe rapidly switches to supplies from the U.S. and the Middle East, Russia’s global will steadily shrink further. That’s a dizzying change for Putin, whose country until last year supplied a whopping 20% of the world’s fossil fuels.

The crisis has brought deep concern among millions, whose energy bills have rocketed over the past year. Even so, oil supermajors have earned a $2 trillion windfall, according to the IEA report. The five Big Oil companies—ExxonMobil, TotalEnergies, BP, Shell, and Chevron—will likely post a $50.7 billion third-quarter profit, slightly down from their all-time record one quarter before, according to Bloomberg estimates this week.

‘No going back’

The implications of the energy crisis are profound, says the IEA, whose flagship publication has made for dry reading for many years; the organization was founded in 1974, amid the last global oil crisis, to represent major consumers and producers

This crisis, it says, is a dramatic turning point for the world, sparked by the Ukraine war, which erupted just as the global economy was digging out from the COVID-19 pandemic. The double-whammy has produced “a crisis of unprecedented depth and complexity,” says the IEA, which represents major energy consumers and producers. “A profound reorientation of international energy trade is underway,” the report says. “Many of the contours of this new world are not yet fully defined, but there is no going back to the way things were.”

Indeed, for the first time, the IEA predicts that global consumption of fossil fuels will reach a high point, or level off, not because of abstract future policies, but because of changes already underway. As EV sales ramp up, global oil demand will peak in the mid-2020s—a decade sooner than the organization previously predicted.

In fact, the IEA believes this year’s seismic events could push countries to speed up their energy transition, since EVs, and solar and wind power are increasingly seen as far less vulnerable to upheavals from war and sanctions. What is unclear is whether a global recession might rein in government investments in renewable energy. “A key question for policy makers is whether the crisis will be a setback for clean energy transitions or will catalyze faster action,” the IEA says.

Hours before the organization published its report, the Global Wind Energy Council, which represents companies in 80 countries, said the IEA report showed how the global oil and gas markets—concentrated in a handful of countries—had been “used and abused” over the past year. “In contrast,” said Sepi Golzari-Munro, the organization’s energy transition director, “renewables provide the opportunity for nations worldwide to benefit from homegrown, secure, and sustainable energy on their own terms.”

I hope this is true but see a lot of wishcasting here.

Russia has used its “oil weapon” before and it may well be that Western Europe, in particular, will find permanent alternatives. And, yes, there has been a slow but inexorable move towards non-petroleum energy sources.

At the same time, we continue to see substantial bottlenecks in the transition to, for example, electric vehicles. And most of Europe and the United States are afraid of nuclear energy, the most viable alternative source out there.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. JohnSF says:

    France is not afraid of nuclear power in the slightest.
    The new planning is for 14 new reactors by 2050.

    Slovakia is fuelling up Mochovce 3 now; and Mochovce 4 should be finished 2025.
    Finland’s Olkiluoto 3 is being brought online; and plans for a sixth reactor are under consideration again.

    Germany (with mini-me Austria) is the main European country where anti-nuclear opinion is dominant, largely for historic political reasons.
    And that has prompted Germany to throw monkey-wrenches into EU support for nuclear power projects, despite this being a primary purpose of the Euratom Treaty.

    There are some indications that German attitudes may be shifting, and also that other countries are less willing to put up with German mulishness in the EU.

    The UK is also pressing ahead with Sizewell C, Hinkley Point C, and still planning for Bradwell B.

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  2. JohnSF says:

    As for electric vehicles, full-battery and plug-in hybrids, which tend to run purely on battery for about half average use, were about 20% UK new car registrations in 2021, and look likely to hit 25% in 2022.
    I think pan-Europe electric vehicle market share 2021 was 17%

    The US appears to be lagging on this; probably because petrol is less expensive there.

  3. Sleeping Dog says:

    @JohnSF:

    Probably the bigger reason for the US lagging in EV conversion is the lack of public infrastructure. Only a handful of states have placed a priority on setting up charging stations, in the others public stations are pretty much restricted to urban areas and interstate rest areas. Also, unless you can charge at home, the savings on the cost of gas are small.

    Things aren’t likely to improve in the US. EV’s are now caught up in our culture wars, cause if Dems are for it, then R’s must be against it. Even if it makes sense from a conservative analysis.

  4. JohnSF says:

    @Sleeping Dog:
    Actually, charging points are still very patchy in the UK.
    And have annoying problems with payment app incompatibility and charger breakage levels.

    That’s one reason plug-in hybrids are so popular.

    If (big if for less well off people) you have off road parking, you can charge at home, and that will cover the average UK commute range of under 15 miles.
    Though that’s far less distance than US average, IIRC.

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  5. JohnSF says:

    There’s also the related factor of declining importance of Arabia/Gulf to the USA as a key strategic area; and hence the reduced importance of the Middle East as a whole.
    Some analysts think US oil independence plays a part in the declining patience of Washington with the antics of MBS and others of the al Saud.

    And also, how far will the dollar, and the demand for US Treasury bonds, and thus potentially the costs of debts, be affected if the “Arabian petrodollar cycle” is no longer the thing it has been?

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  6. Michael Cain says:

    The IEA (and EIA in the United States) used to be known for getting forward-looking trends badly wrong. Their modeling approaches were entirely geared towards matching what the politicians said they were hoping for. I haven’t paid close attention to the IEA for years, and use the EIA only for historical data, so don’t know if the problems continue.

  7. Just nutha ignint cracker says:

    The crisis has brought deep concern among millions, whose energy bills have rocketed over the past year. Even so, oil supermajors have earned a $2 trillion windfall, according to the IEA report.

    I don’t have a comment. I’m just testing to see if Lounsbury will show up shouting “Nothing to see here, Lefties; move on! Move on!”

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  8. Just nutha ignint cracker says:

    @JohnSF: “the average UK commute range of under 15 miles.”

    I think you’ve stumbled onto something on this point. My average commute was never less than 25 miles from the time I first owned a car and was driving to college until I deliberately moved a mile away from my job to save money to go to college a year before the hostile takeover. Even after that, my average commute was closer to 50 than to 15 every year until I moved to Korea and didn’t commute at all. (Hagwons want you to be close enough to walk to your job, so they don’t have to provide taxi fare.)

  9. EddieInCA says:

    @JohnSF:
    @Just nutha ignint cracker:

    A few months ago, I put a refundable deposit on a new 2023 Kia Niro EV. However, the wait time was for delivery was four months. While waiting for the stock to come in, I started thinking about my actual needs. I kept a journal for 30 days of all my driving. I spent almost $800 on gas in one month between the two Porsches. But what I realized most was that 92% of my actual driving time in both time and miles was alone. And most of that was my 23 mile daily commute to Warner Bros from my house in the valley. So I cancelled the Niro purchase on Monday and purchased this…

    https://www.emvauto.com/

    100 mile range. Top speed of 80mph. Single seater. Can plug into a household outlet if needed. It’s odd, but it’s fun to drive, and it will be perfect for my everyday driving.

    An acquaintance of mine owns one and I test drove it and freaking loved it. With a sticker of $18.5K, and a $3K cash incentive at purchase, it’s going to be less than $18K out the door. It will pay for itself in less than 19 months.

    Anyone interested in a used Porsche 911 or Cayenne? They’re both for sale soon as I take delivery in two weeks.

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  10. steve says:

    I hope they are right but Think its bad to underestimate stupid. It was never good to be so reliant upon Russia and Saudi, but it was convenient, and at one time we didnt have that many options. Now we do, but its going to take a while to get there. It will be easier, especially with the guaranteed political opposition to slip back into dependency. In the US the oil company advocates will claim that we can produce enough for our own consumption so its not an issue, but when prices go up everywhere else they also go up in the US, even if we are producing enough for our own internal use.

    Steve

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  11. Just Another Ex-Republican says:

    Nothing lasts forever, especially where greed gets involved. If Russia behaves semi-responsibly for a few years and fossil fuel costs drop again, they will get their influence back.

    2 f***** trillion dollars…how big oil hasn’t run afoul of anti-competitive/oligopoly laws I will never understand. Prices at gas stations-while not equal-move in lockstep with each other and have for decades.

    As a friend of mine once said: “Do you want pitchforks? Because this is how you get pitchforks.”

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  12. JohnSF says:

    The other problem Russia has is that it’s a high-cost producer.
    There are good reasons why it wanted internationals like BP, Shell, Exxon etc as partners, and western banks involved in the finance.
    The fields are expensive to set up, expensive to run, and require engineering skills and capital equipment Russia doesn’t have.
    Without those, Russian production is going to decline.
    They are not coming back under the current regime.

    Also, oil is relatively easy to market elsewhere.
    Natural gas is not; and equated IIRC to about a quarter of Russian oil earnings.
    The European market is gone, IMO gone for good.
    And replacing that market is going to need massive investments in pipelines, LNG terminals and tankers.

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  13. JohnSF says:

    @Just Another Ex-Republican:
    Well, they would move in step: they all use the same futures and spot markets for trding and pricing.
    Unless you ban open-market trading in oil and tie it to vertical in-firm use, I don’t see how you avoid that.
    And vertical integration has it’s own pitfalls.

    Of course there should be windfall taxes, though.

    Unless driving for opening up new fields globally; which is not the case, for CO2 reasons.
    One thing might be to give oil companies a tax offset for investment/production of CO2 neutral energy? Could be a handy motivator.

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  14. Neil Hudelson says:

    @Sleeping Dog:

    Only a handful of states have placed a priority on setting up charging stations, in the others public stations are pretty much restricted to urban areas and interstate rest areas. Also, unless you can charge at home, the savings on the cost of gas are small.

    Things aren’t likely to improve in the US.

    Happy to be contrary here. Last month every single state adopted plans for statewide charging networks. Sure, some States may be slower to implememnt it than others, but from what I’ve read it appears the majority of States east of the Mississippi (where things are generally a bit more dense) are moving quickly to build out the plan.

    https://www.cnbc.com/2022/09/27/ev-charging-stations-on-highways-dot-approves-50-states-plans.html

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  15. Just Another Ex-Republican says:

    @JohnSF: Sure their input prices all changed equally. But none of them chose to, say, try and gain market share by not raising prices, or at least not raising prices by as much as everyone else? Obviously they didn’t have to in order to stay profitable. All of them have the exact same processing costs and overhead so gosh darn it, they all just HAVE to raise the output price by the same amount? And none of them can think of cost-cutting measures to improve the bottom line?

    The price-fixing is so “in your face” we’ve become immune to it. But it’s still an oligopoly, not an actually competitive marketplace.

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  16. JohnSF says:

    @Just Another Ex-Republican:
    Actually in the UK, the independents were trying to undercut the oil company chains; both undercutting the supermarkets.
    Which turns things on their head; usually supermarkets are the cheapest.
    (Most expensive are motorway service stations, and by a long way).
    But supermarkets tend to buy in bulk, and shave their profits to the bone.
    They couldn’t match the ability of independents to buy on the spot price market.
    But as spot trading stocks have declined, now the oilco chains are cheapest!

    In any case, after dipping down to around 160/L it’s jumped again to average 166 yesterday.
    Local supermarket this evening showing 170/L.

    Thing about the oilcos in UK (dunno about US) is they all treat their chains (which are often franchises, in UK) as separate operating companies; in some cases they are legally separate.
    And the independents generally use fuel really only to cover overheads and base operating costs; profits come from the mini-mart side of things.
    And all of them maximise efficiency.

    Near-lockstep prices can be a sign of a cartelised market; but equally can e indicative of near-perfect competition.

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  17. JohnSF says:

    For reasons why, even before it invaded Ukraine, the Russian hydrocarbon based political economy was deeply problematic, this is worth a read: Russia’s Unsustainable Business Model: Going All In on Oil and Gas

  18. dazedandconfused says:

    I recall reading something written in the early 70s about Saudi Arabia having permanently screwed themselves with their embargo which caused long gas lines in around the world. Wish I could remember exactly where I saw it for a cite. But I can find a cite for “It’s tough to make predictions, especially about the future.”

    As long as political systems can still be destabilized by spikes in oil and gas pricing and Russia has a lot of both the door to forgiveness will remain ajar.

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  19. Just nutha ignint cracker says:

    @EddieInCA: Looks cute, but I really need a car that can also take Luddite and me to the Korean restaurant in Hollyweird district at a minimum and I can’t afford to run 2 cars.

    When I was younger, I’d have taken you up on that 911, but arthritis is a real thing for me now and my spine is starting to form calcium growths, so I can’t anymore.

  20. Just nutha ignint cracker says:

    @JohnSF: Wait… You’re already taxing their income streams, the income streams of their employees and the capital gains and dividends of their investors, and now you want to tax their windfall profits, too? When are you lefties gonna stop with all these efforts to absolutely destroy people’s lives and livelihoods?

    1
  21. JohnSF says:

    @dazedandconfused:
    A primary reason for the embargo was to remind the US that the conservative Arab states could not afford to risk too much popular discontent being stirred by Israeli military victories.
    And at the time Arabia was not as socio-politically dependant on high oil revenues as it later became.

    Other than that, they were content to play their part in the US/western system: exporting the oil required by expanding economies, and recycling the dollars earned into US bonds,eurodollar accounts, and massive levels of western imports and contracts.
    And remaining military protectorates of the US.

    The only effective alternative for the US would have been to seize the oilfields and expel the local populations.
    Not really satisfactory.

    Russia is a totally different case.
    It has mounted a direct military assault on a western aligned country.
    It is a large but high-cost producer, with a large state budget requirement for oil revenues.
    It is dependant on outside technology sources for field development and operation.
    It is facing a period of softening overall demand levels for hydrocarbons in key markets.
    The European gas market will not return as long as Putin or a nationalistic successor hold power in Moscow.
    Even a “liberal democrat” in control in Moscow (highly unlikely) is not going to see much enthusiasm for Nordstream ever coming back: der Grunen would exit any coalition that proposed that.
    The Baltics, Finns, Poles and others are similarly unlikely to risk their economies ever again being dependant upon an assumption of Russian goodwill.
    France wishes to purge as much EU dependance on hydrocarbon imports as it can, within bounds of economic viability, permanently.

    1
  22. JohnSF says:

    @Just nutha ignint cracker:
    @EddieInCA:
    If a cute, but more than single seat, electric is required, are the Mini Electric or Fiat 500e available in the US?
    Two on my shortlist when replacement time arrives (assuming available reasonably priced 2nd hand, cos I’m a cheapskate)

    I’d also be in the market for a 911, assuming RHD, available for under £15k shipped, and if I could bear the servicing costs, LOL.

  23. Just nutha ignint cracker says:

    @JohnSF: Mini E–Starting at $33,900.
    Fiat 500e–Starting at 33, 210, but it is a Fiat Chrysler, so it’s got that working against it.

    So, yes, they are available and only slightly over twice what I paid for my similar sized ICE car when I bought it–at the top of the currency exchange swing. (Built in Korea; it’s replacement would run me about $12k at the moment, based on ads that I see. Which, incidentally makes the Chevy Bolt, at ~$36k last time I checked my local dealer, an even spendy-er choice than it’s been.)