The cratering oil price has not only been disastrous to the Russian economy, it has also removed Putin’s big stick against sanctions over the invasion of Ukraine. On its part, Europe, mindful not only of its vulnerability to petro-blackmail from Russia, but also gas disruptions caused by the civil war in Ukraine, has worked to find alternative energy sources.
Russia has a tradition of threatening to cut (or actually cutting) natural gas supplies to Europe in order to win diplomatic concessions, usually in winter. The Russian seizure of Crimea in 2014 and the ensuing civil war in Ukraine led to wide-ranging EU sanctions against Russia. Russia has once more gone to its “big stick” of threatening gas deliveries to Europe as a way of breaking EU consensus over continuing sanctions.
About half of the natural gas traveling from Russia to Europe passes through Ukraine, which has the habit of siphoning off a portion for its own use. This has given the Russians a pretext for squeezing the EU’s gas supplies, by blaming the Ukrainians. It also means that Russia does not have complete control over the natural gas transportation to Europe.
Therefore, Russia has recently focused on constructing additional pipelines to Europe in order to bypass Ukraine and increase EU dependence on Russia gas. The 2012 South Stream project, which would have run under the Black Sea to eastern Europe, was abandoned after the EU blocked construction as part of sanctions. Focus then turned to a new pipeline through the Baltic, called Nord Stream II. This would tie Germany directly to Russian gas exports, increasing EU vulnerability to Russian blackmail. It would also mean more precarious deliveries in Eastern Europe, as Russia de-emphasized Ukraine as an transit point.
The resulting political turmoil was exactly what Russia had hoped for.
Of course, tying Europe to Russia for its energy needs isn’t all about Moscow’s political concerns. Plunging oil prices have hurt the Russian economy in a way that sanctions never could. Oil and gas make up 70% of exports and 52% of government income in Russia. This means that the Kremlin needs to pump as much oil and gas as possible, to make up the shortfall in revenues. It also makes EU efforts to diversify its energy sources a danger to Russia’s economy.
Breaking Those Chains
These diversification plans began bearing fruit last spring, when Norway became the leading supplier of natural gas to Western Europe. An EU report this month emphasized developing natural gas deliveries from the US and Australia, but such measures will take approximately four years of building infrastructure before Liquified Natural Gas (LNG) shipments to Europe can begin in earnest. The first shipment of US natgas to the EU is expected to depart this month.
Transport by ship is of course more expensive than pipelines. This gives Russian oil giant Gazprom plenty of room to initiate a price war to stop US LNG shipments. They may be underestimating American resources to fight back. The US has so much natural gas, that many drilling operations burn it off at the well head, instead of capturing it for sale. Bloomberg notes that it would take 163 LNG tankers the size of the one about to deliver the first shipments to Europe to take natgas stockpiles down to normal levels.
The trickle of US crude exports to Europe began in January, when the tanker Theo T headed for France. The US is not the only competitor that Russia faces in retaining market share. Both Saudi Arabia and Iran have been courting European customers with discounts on crude shipments.
With crude stockpiles the highest since 1930 ushered in the Great Depression, US shale companies are looking for any markets they can find, and are willing to fight for them.
Whether through politics or economics, this means the days of Europe cowering under Putin’s “big stick” are numbered.
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