But it was the longer-term effects of that ‘oil shock’ that was more important. From a move to find oil sources not dependent on the OPEC cartel to cars being made more fuel-efficient, those effects are still being felt today.
Nearly half a century later, the world is faced with another oil crisis, initiated by another war, this time Russia’s invasion of Ukraine. Will the impact on the global economy and geopolitics be similar? Already, it is clear that the world will continue to grapple with the after-effects of this energy crisis for years to come.
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“The world is in the midst of its first global energy crisis—a shock of unprecedented breadth and complexity…energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come," the International Energy Agency, an autonomous intergovernmental organisation working in the energy sector, said in its latest World Energy Outlook released recently.
Energy shock
One important difference between the energy crises of the 1970s and that of today is that the current crisis is much more broad-based. The current crisis covers not just oil, but also gas and other fossil fuels.
The epicentre of the crisis has been Europe, which this year has realised the cost of its dependence on natural gas imported from Russia. In retaliation for sanctions for its invasion of Ukraine, Russia cut off natural gas supplies to Europe, setting off a mad scramble for alternate sources of gas. Between January and July this year, the International Monetary Fund’s global gas price index, a weighted average of gas benchmarks across the world, rose by 72%.
But since then, gas prices have fallen dramatically, mainly due to ‘demand destruction’—fall in demand due to high prices. The US Henry Hub price, a key natural gas benchmark, is currently at around $5 per million BTU (British thermal unit), down almost 50% down from its levels in August. Milder temperatures in Europe and the US in the last two months have also contributed to the fall-off in demand.
Asian countries, including India, will be watching anxiously to see if this trend of falling prices continues. When gas prices had shot up earlier this year, it was because European buyers had outbid Asian countries in the global LNG markets. As a result, India, which imports almost half of its natural gas requirements, saw a year-on-year decline of about 19% in its LNG imports in August. This had a trickle-down effect on consumers: piped cooking gas users, the fertilizer industry (where gas is a key input) and CNG vehicle owners had to pay higher prices.
For now, though, Europe’s demand has been satiated. It has managed to fill up almost all its spare gas storage capacity and is unable to buy more. Most analysts estimate that Europe has enough gas to see it through the winter. With one caveat. If European winter temperatures are lower than normal, European demand for gas for heating will shoot up again. Again, it will be Asia that will also feel that chill of a European winter.
Russian realignments
But there is a longer-term shift that is more fundamental. Even if the Ukraine war ends tomorrow and Russia’s connections to the global energy market are ‘normalized’, the energy dependence of Europe on Russian natural gas will never be the same again. “Within Europe, there is no going back to the status quo ante once the Russian-Ukrainian conflict finds some sort of resolution or stasis. The 50-year relationship was based on trust, and that trust has been irrevocably broken," pointed out Michael Stoppard of S&P Global Commodity Insights in a recent article.
As a result of the stoppage of Russian gas, Europe’s biggest economy Germany has scrambled to source alternatives. The major replacements for Russian gas have been Norway (37.6% of Germany’s requirement in September 2022 versus 19.2% in September 2021), and the Netherlands (29.6% versus 13.7%), according to Reuters. The country is also building four floating LNG terminals to be able to import liquid gas and regassify it before use.
The ripples of those realignments will also be felt by big consumers like India, which will have to make increasing efforts to ensure gas supply security as Europe will continue to look elsewhere. In the long run, global supplies are likely to rise to meet demand. But in the short and medium term, it’s anyone’s guess as to where gas prices are headed.
With oil, it’s a similar story. When Russia was shut out of oil markets after the invasion, it began offering oil at a discount and found many willing buyers—among them India. In less than a year, Russia’s share of Indian crude oil imports soared from around 1.7% as recently as March to close to 20% as of August (Chart 1). It is now India’s third largest supplier of crude oil, just behind Saudi Arabia and Iraq. Not just India, China, too, has seen imports of Russian crude oil soar this year.
In December, a full-scale European embargo on Russian oil begins, followed by further such sanctions in February. As a result, Russia will be even more hard-pressed than it is now, to find buyers for its oil.
“There’s a crucial import ban that starts on 5 December for Europe, and then there’s a product import ban that starts on 5 February, so if nothing else changes, then what that means is that Russian oil would need to find a home that isn’t the UK, the US or the EU," Russell Hardy, CEO of Vitol, one of the world’s largest oil traders, told an oil industry conference in September, according to the S&P Global Commodity Insights website. “It’s going to go further and longer distances and find different markets, and for doing that, it will have to trade at a discount."
The ‘break’ between Russia and the West will likely last for many months, if not years. Indeed, the IEA sees this ‘rupture’ between Russia-Europe energy flows as ‘permanent’. If this is the case, and if Russia’s main markets will continue to be Asia (including India) in the medium to long term, this portends a major restructuring of fuel supply routes and infrastructure. Heavy new investments in such infrastructure to facilitate exports to Asia will be needed.
What does this mean for India? The US and other Western countries have been trying to get India to move away from Russian imports of fuel. But so far, this has been mostly talk. Ultimately, discounted Russian fuel has been far too attractive an option to ignore at a time of rising domestic inflation. Ironically, in the years ahead, India’s trading relationship with Russia could turn out to be as important to it, as the trading relationship with Russia’s predecessor, the USSR.
Transition to clean energy
In the scramble to ensure energy security during the crisis, and also the disruptions to global shipping due to covid-19, countries have actually increased their reliance on fossil fuels such as coal. But the IEA is clear that this shift is only short term. Ultimately this crisis will accelerate the ‘transition’ toward a greater use of renewable fuels and demise of fossil fuels.
“As markets rebalance, renewables, supported by nuclear power, see sustained gains; the upside for coal from today’s crisis is temporary," says the IEA’s World Energy Outlook 2022 report. In line with this, the report predicts that coal demand will plateau over the next few years, natural gas demand will plateau by the end of the decade, and oil demand as a whole by the middle of the next decade.
In India’s case, for instance, the report (assuming a scenario where current government policies on energy stay the same) predicts a dramatic shift. Over 80% of India’s electricity is currently being generated by coal. The latest IEA Energy Outlook predicts that share to fall by almost 20 percentage points in less than a decade. By 2050, that share will fall further to about a fifth. In less than eight years, the share of solar power and wind energy in India’s total electricity generation will rise to about 27%, from 10% currently (Chart 2).
But in absolute terms, India will continue to be one of the world’s largest consumers of fossil fuels. “Even though India continues to make great strides with renewables deployment and efficiency policies, the sheer scale of its development means that the combined import bill for fossil fuels doubles over the next two decades, with oil by far the largest component. This points to continued risks to energy security," says the IEA.
The years ahead
The IEA’s scenarios, predicting the massive uptake in global renewables and the consequent reduction in demand for fossil fuels within the short space of a decade, seem highly optimistic. It is fair to say that many national governments, whether India’s or of other countries, especially in Asia, will be far more circumspect in their outlook. Countries, bruised and wounded by the sudden energy crisis of 2022, will likely prioritize energy security over all other goals, including that of the transition to clean energy.
What can India look forward to? In the next few years, many analysts, and even the IEA, expect natural gas prices to remain high, even as new gas projects come onstream in the Middle East and other countries. This has important consequences for India, where city gas projects have taken off in recent years—customers can expect to pay more for piped gas and CNG vehicle fuel.
India’s dependence on Russian fuel supplies seems more than a short-term shift. Assuming that the Russia-Europe energy trade is at an ebb for the foreseeable future, Russia will look to other countries, mainly in Asia, to sell its fuel to. India is likely to be a major buyer in the years to come, for no other reason than that it will be one of the world’s biggest fossil fuel consumers. And if Russia manages to build more permanent natural gas infrastructure such as pipelines to Asia, India could become a major importer of Russian gas as well, though this will have its impact on domestic prices only in the longer term.
The impact on India’s transition to renewables as a major source of energy is still very much in the air. Renewables will continue to grow in importance in years to come, but the fact is, we will continue to be, both in absolute and relative terms, major consumers of fossil fuels.
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