Europe’s energy agenda after the Ukraine War

As the Russian invasion of Ukraine continues, it is becoming clear that a lot more is at stake than just the future of Ukraine. Big shifts in global order are set to follow because Russian bad behavior is triggering a reorganization of global energy supplies. 

Russia is the second most important exporter of oil to the global market, after Saudi Arabia.  It is the largest single supplier of gas to Europe.  Before the war, this dependence put Russia in a special position—able to earn massive export earnings while protecting the nation from much retaliation.  All that is now changing.  

The key to the new order will be Europe.  With breathtaking speed and unity, the Western nations have sanctioned Russia and branded the country a pariah.  Lots of countries have played a role, of course.  But Europe has been central because it is the most dependent on Russian energy supplies and also holds most of the keys for cutting that dependence.  

So far, the sanctions regime has covered practically everything but energy.  It has largely closed Russian access to western banking and airspace; the sanctions isolate members of Putin’s regime and family and seize Russian assets and financial reserves.  But oil  and gas have kept flowing, for now, because there’s no practical alternative.  Shutting those supplies quickly would cause massive economic harm and probably splinter the western alliance as individual nations seek their own special deals.  The politics of dependence are ugly—something the West has known since the first energy crises of the 1970s.

What’s special about Europe is the massive effort, unfolding right now, to make permanent cuts in dependence on Russian supplies.  The result will be an energy system in Europe that is much less dependent on fossil fuels—and thus a lot cleaner.  And for Russia the outcome will be permanent economic harm that will take a generation or longer to recover, if ever.  

Over the short term the European plan is to find any energy supply that will burn and doesn’t come from Russia.  That means a bit more coal along with more oil from the rest of the global market.  Saudi Arabia and the rest of OPEC have been visibly unhelpful—refusing to deviate from production plans set before the war.  Winners in this effort to find new supplies include Libya and Iran—two countries on the fringe of global oil markets but invited back, quickly, because they are less abhorrent than Russia.  None of this is politically elegant and none of it will do much to cut emissions, for now, but all of it will isolate Russia.  

Replacing Russian gas will be harder.  For now, Europe, which buys about 40% of its gas from Russia, will source as much as it can from other suppliers—such as by tanker from the United States.  That tanker gas is expensive because it must be cooled and compressed to make the gas a liquid—a process that, itself, uses a lot of energy.  Worse, Europe must pay prices high enough to attract that liquefied gas that, otherwise, would go to markets in Japan, Korea, China and the rest of Asia.  For these reasons, the price of natural gas in Europe today is about five times the level it should be this time of year.  With costlier gas has come costlier electricity and a drag on the European economy.  

Over the short term, the next year or two, Europe will do what it must do.  But over the longer term the European response is what’s most important.  Big investments in efficiency along with alternatives to oil and gas—such as electric vehicles and hydrogen—will put Europe on a trajectory of much lower consumption of fossil fuels and emissions.  

The European investment to cut dependence on Russian oil and gas matters not just for Europe but the rest of the world.  That’s because big European investments in new technology will drive down costs, and those lower cost devices will be available to the rest of the world.  This logic is exactly how solar energy, today often the cheapest form of generating electricity, got competitive.  It started in niche markets — first the U.S. and Japan, then in Germany — and from there global manufacturing (centered in China) drove down costs further.  As the new technologies got cheaper their backers also got more powerful politically, which cemented the revolution.  One of the leading approaches to cutting dependence on natural gas—shifting to hydrogen—is poised to have its solar moment.  

A lot can go wrong of course.  Elections in France and the US could put demagogues in power that will make it harder for the west to stay unified.  China and India will inevitably erode, a bit, the impacts of western sanctions by purchasing Russian energy supplies, especially oil, on the global market.  

But what’s most surprising, so far, is how much has gone right.  After decades of a foreign policy marked by disagreement and incoherence, The crisis in Ukraine has unified Europe.  And the place where that unity is perhaps most apparent is energy policy.