Russia’s invasion of Ukraine is a catastrophe for its oil industry

A quick look at the numbers will show how intertwined Europe and Russia are, and how the Russians have taken aim at the goose that lays the golden eggs. Here are the numbers, all rough and all changing fast. First, the world consumes approximately 97 million barrels per day (b/d) of oil. The Russians produce about 11 million b/d. They are big producers. They export about 8 million b/d. Now it becomes relevant to the current crisis. The Russians send about 80% of their exports to Europe. And the Europeans get 40% of their oil from Russia. In other words, to get rid of Russian oil within five years, the European target, about 6 million b/d of alternatives must be found, whether from other oil sources or non-oil energy or energy efficiency measures. This will take more than going to Saudi Arabia or the United Arab Emirates and asking them to be nice and turn up the “tap” on, say, one or two million barrels a day.

That’s one side. But think about the Russian side. Russia may bring in $300 billion a year from oil exports at current prices. Russia’s total gross domestic product before the invasion was only $1.5 trillion, making its economy smaller than Italy’s and about the same size as New York State’s. Short-term sanctions against Russian oil could have a brutal impact on Europe, but they will have catastrophic consequences for Russia. In the long run, even if the war ends soon and sanctions are imposed, Russia risks losing its largest export market. Europeans (including the British who are not dependent on Russian oil) have already taken active steps to conserve nuclear power, build renewable generation and develop hydrogen sources. The war in Ukraine is only accelerating those efforts and also eliminating Russia’s nuclear export potential, at least to Europe.

In the United States, politicians take a different tack. The war in Ukraine demonstrates to them the need to expand fossil fuel production and remove environmental protection measures that could slow that process. Nuclear lobbying efforts in Europe have increased in our view, and we would expect the same to happen in the US. What we are not seeing, however, is a coherent national effort to fund nuclear energy. This is surprising when you consider how much money the construction (and related) industry could make from a large-scale expansion of nuclear power. But that’s another matter.

To sum up the economic consequences of this horrific conflict, the Russians have taken steps to hurt their largest energy commodities customers to the point that the customers intend to end the relationship. This jeopardizes an important source of income that sustains the Russian economy. This suicidal commercial move could turn the oil and gas markets upside down. After this, the Russians will have to switch to China (or India) as their main buyer of raw materials. And with no other recourse, the Russian oil and natural gas sellers will take whatever a monopsonistic buyer offers to a temperamental supplier. Which is as little as possible. For Europe, the war will lead to a battle for oil and gas supplies, a renewed effort in the renewable sector and possibly a nuclear revival or at least a postponement of existing plant closures. We expect similar activity in the United States, with a greater emphasis on fossil fuel production. But in reality, high fossil fuel prices make competing energy sources such as renewables and nuclear power more attractive in the long run. President Putin may have done more to jeopardize the future of the fossil fuel industry than anyone in its history. For many, the question will now become, “Who needs these ongoing geopolitical risks when we can make (at least some) of our own energy nearby?”

By Leonard S. Hyman and William I. Tilles

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