Russia’s Invasion of Ukraine—Transatlantic and Energy Implications
In Europe, where domestic production is slowing and imports are rising (about 80 percent of EU gas and over 90 percent of oil is imported), the added costs are a challenge to household and industrial consumers and governments, exacerbating the slow or stagnant growth experienced during the Covid pandemic. The European Union’s reliance on Russian imports of natural gas and oil is an additional burden on costs, as Russian supplies have been lower than usual in late 2021 and early 2022. The EU imports about 75 percent of its gas via pipeline and about 25 percent via liquified natural gas (LNG). The importance of LNG has been increasing; since the 2009 Russia-Ukraine gas crisis, eight new LNG terminals have been added to boost LNG imports. Renewable energy production in the EU has increased significantly since 2010, but all EU member states are still net importers of energy.
Implications for the Transition to Clean Energy
Some are concerned that EU governments may be reluctant to move forward with the clean energy transition and the Fit for 55 package because of high fossil fuel prices, Russia’s invasion of Ukraine, and the sanctions imposed on Russia. But there is no better time than now for those initiatives. High prices should be an incentive to move faster and further on energy efficiency efforts, reducing the overall consumption of energy because energy saved is money not spent—an important aspect for addressing energy poverty and low-income consumers. Of the ten ways that the EU could reduce its use of Russian gas, as identified by the International Energy Agency (IEA), turning down thermostats by just one degree would reduce consumption by 10 bcm/year (40 percent of natural gas in Europe is used for heating). The high cost of natural gas should be an added incentive to move faster on the methane-reduction strategy—reducing flaring and more quickly rolling out new technologies to reduce methane leakage—and bring down the price of “green” hydrogen, produced from renewable energy sources, which was more expensive when natural gas prices were very low, even factoring in carbon capture and storage costs.
There should be only limited incentive to switch from natural gas to coal, which would hinder decarbonization efforts, as its price has also increased and the carbon price under the Emissions Trading System has increased significantly, providing a good disincentive for significant switching. High energy prices should also drive forward better storage technologies for renewable energy sources of electricity.
Taxes are a large component of energy prices in the EU, so the proposal by the European Commission (EC) to revise the energy taxation directive could add further disincentives to fossil fuel use (along with removing fossil fuel subsidies), help compensate citizens suffering from energy poverty, and encourage renewable energy sources. The EC toolkit to address high energy prices and its REPowerEU plan should also help to motivate and support efforts toward a faster clean energy transition, further investment in renewable energy, and innovative (including digital) technologies for more efficient use. It is more challenging to encourage significant change when prices are low and supplies constant.
Embargoes on Russian Oil and Gas
The US and UK embargo on imported Russian oil and gas announced on March 8 will have only a limited impact on their energy supplies. In the case of the United States, Russian imports comprise a relatively small portion of total US imports and, as the biggest producer of oil and gas in the world, US domestic production is robust, although it will take some time to significantly increase production levels. In the case of the United Kingdom, most of its imported gas and oil comes from other sources; only 12 percent of crude oil and 0.008 percent of natural gas come from Russia. But when it comes to the EU, sanctioning Russian oil and gas would have a significant impact on the economy, and the fourth package of EU sanctions included some energy aspects, but carefully avoided limiting imports of gas and oil.
All EU member states are net importers of energy. Domestic production of oil and gas has been decreasing significantly over recent years and Russian supplies, particularly natural gas, now account for 40 percent of EU imports. The LNG market is more flexible and more global than the piped natural gas market and has been growing steadily, but in the EU, good gas interconnections help to move piped gas from point of entry to multiple destinations. To help meet EU demand, US exports to the EU have risen significantly over the last four years and now make up 26 percent of all LNG imports (Qatar is 24 percent and Russia 20 percent). Indeed, since 2009, eight LNG terminals have been built in the EU. Germany has announced that it will build new LNG terminals in response to the Russian invasion of Ukraine, following its earlier decision not to certify the Nord Stream 2 pipeline that would have delivered very large quantities of gas bypassing Ukraine. The potential for significant increases via pipeline is limited from other main suppliers—Norway, Algeria, and Azerbaijan—to the EU.
EU consumers will certainly feel the impact of reducing demand for Russian oil and gas, particularly in a tight market where alternative supplies are limited, at least in the short term.
The EU would be cutting off its nose to spite its face if it were to impose an embargo on imports of Russian gas and oil, but reliance on Russian gas and oil will have to reduce significantly and quickly to effectively implement energy security, the first principle of the EU Energy Union. EU solidarity, along with G7 and other like-minded countries, in support of Ukraine has been impressive and polls indicate high approval for sanctions—even where they will hurt the sanctioners as well as the sanctionees. EU consumers will certainly feel the impact of reducing demand for Russian oil and gas, particularly in a tight market where alternative supplies are limited, at least in the short term.
Transatlantic cooperation and coordination must continue in the face of Russian aggression. The EU member states can increase the amount of LNG and pipeline gas from other sources, but this will not be able to compensate in full for all reductions from Russia—and will come at a price; increase its biomethane production; increase green hydrogen production; rapidly rollout rooftop solar installation; reduce renewable permitting times and encourage further investment in renewable energy projects; increase gas storage; and maintain its safe and secure nuclear energy production. A rapid and successful conclusion of the Iranian Joint Comprehensive Plan of Action would help to bring more oil onto the market, US LNG can continue to flow, and market pressure could be relieved by ramping up US and OPEC oil production. Further, EU member states which have not yet done so should rapidly ratify the Canada-EU Trade Agreement to encourage even more trade with Canada—an important producer of grains, fertilizers, oil, and gas.
It is a tragedy that Russian aggression in Ukraine has given transatlantic partners an even greater incentive to work together.