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The Reshaping of the Global Energy Pattern Under the Background of the Russia-Ukraine War



Energy has been used as a “weapon” many times in history, and its effectiveness has been tested repeatedly. During the two oil crises in the 1970s, oil and gas resource countries in the Middle East took up oil weapons to defend their own rights and interests, forced back the coercion of the United States, and won the final victory.


Since the 21st century, the power of energy weapons has been fully demonstrated. Today, strategic materials such as energy, food, and precious metals have once again become weapons in the game of great powers.


Energy Weapons as a Double-edged Sword


Energy weapon is a double-edged sword; it often hurts themselves while hurting the opponent.


"The Russia-Ukraine War (RUW) has actually induced roaring cereal and oil prices, and global inflation. (Deng et al., 2022)." Russia’s use of energy weapons to counter Europe will have a far-reaching adverse impact on its future supply market direction. In the same situation, the United States and Europe use energy weapons to accelerate their independence from Russia’s energy, resulting in high global oil and gas prices. The explosion of inflation in the world is expected to be unexpected in 2023.


Unexpected Explosion of Global Inflation



The impact of high oil and gas prices and high inflation on the eurozone and the UK is also not optimistic. The European economy is in constant trouble, inflation is severe, and the inflation rate is even higher than that of the United States. According to the forecast of IHS Markit, the expected inflation rate of the eurozone and the UK in 2022 are above 8%. The UK’s GDP increased by only 0.3% month-on-month in August, and a recession is expected from late 2022 to the first half of 2023. Germany’s GDP is expected to increase by only 0.5% year-on-year in 2023.


The Global Oil and Gas Trade Flow Is Reshuffled


Economic globalization has developed incisively and vividly manifested in the field of energy. According to the fundamental laws of supply and demand, energy flows freely in all continents, resource and consumer countries, and all corners of the world. Recently, however, this trend has been disrupted by strong geopolitical forces.


  1. First, there is an urgent need to find a market for a large amount of LNG in the United States and to use resources to seek geopolitical advantages in Europe;

  2. Second, Europe is trying its best to get rid of its energy dependence on Russia as soon as possible;

  3. The third is that Russia used energy weapons to counter the West under the early squeeze by the United States, Europe, and NATO and the subsequently repeated sanctions in the later stage.


The fierce competition between these three geopolitical forces has led to a significant reshuffle of global oil and gas trade flows.


After the sharp drop in crude oil exports to Europe, Russia took the initiative to sell crude oil to markets outside Europe at a discount of more than 30%, among which India, China, and Turkey are the largest purchasers.


According to data released by IHS Markit, in April 2022, EU imports of Russian oil decreased by 380,000 barrels/day compared with the same period in 2021, a year-on-year decrease of 16.5%; imports from the United States and North Africa increased by 270,000 barrels/day and 250,000 barrels/day respectively, a year-on-year growth of 35% and 57%. From May to July, Russia’s crude oil sales to India reached 700,000 barrels/day, 950,000 barrels/day, and 1 million barrels/day, respectively; in May, the additional crude oil sold to China was 800,000 barrels/day, increased to 1 million barrels per day from June to July; crude oil sold to Turkey reached 200,000 barrels per day.


According to Wood Mackenzie's analysis, Russia's anti-sanction and economic self-rescue measures against Europe have exerted great power.


Rouble settlement order, natural gas supply reduction initiative, cooperation with OPEC countries to reduce production and promote prices, and oil discount promotions, etc., have effectively alleviated the pressure on the United States.


The series of severe sanctions imposed by Europe has made its economy resilient to the sanctions. Super high oil and gas prices and robust exports have enriched the Russian government's coffers and weakened high inflation. However, the withdrawal of foreign capital, equipment technology, and restrictions on imports of components and other parts still significantly impact the economy.


In recent years, Europe's oil imports from Russia have basically stabilized at around 200 million tons per year, and it is planned to reduce imports of Russian oil by 90% from the end of 2022. This means that the Russian and European energy markets will face two changes.


First, Europe needs to organize additional oil sources of 180 million tons annually. The Americas, Africa, and the Middle East may become alternative oil sources for Europe. From the analysis of safety and economy, Europe is more likely to seek alternative oil sources with shorter voyages and more accessible control from South America, North Africa, and West Africa.


Second, Russia must find new buyers for 180 million tons of oil annually. Therefore, further expanding the vast international market with the Asian market as the main body is the next goal for Russia to achieve.


After 3-5 years of flow direction adjustments, a new pattern of flow direction will be formed in the global oil trade. More oil from the Middle East, Africa, and the Americas will flow to Europe, while Russian oil that originally flowed to Europe will flow more to Asian markets such as China, India, Pakistan, Southeast Asia, and Turkey, and these countries will naturally reduce oil from the Middle East, Africa, and the Americas. As a result, the world will form a new oil supply-demand balance under this trend.


In terms of natural gas, after the great reduction of the annual flow of more than 180 billion cubic meters of Russian natural gas to Europe, Russia will have to turn to the Asian market, most likely to build a new Sino-Russian natural gas pipeline and speed up the construction of the Turkmenistan-Afghanistan- Pakistan-India (TAPI) line.


Europe will do everything possible to find LNG supply sources, mainly turning to the United States, Qatar, Canada, Indonesia, Mozambique, Nigeria, Mauritania, and other countries. As a result, the flow of global oil and gas trade will undergo a significant reshuffle, gradually shifting from globalization to "two hemispheres" evolution.


The Replacement of Traditional Energy by New Energy Is Intensified


Europe is in an energy dilemma. Although returning to the coal age has greatly reduced Europe's energy transition commitment, it is only a reversal of the substitution of low-carbon for high-carbon traditional energy. In contrast, the development of new energy and the substitution of new energy for traditional energy only speeds up, not backward.


Facing the gas cut-off crisis, Europe’s desire to develop new energy sources is still more urgent, and the pace will be even more incredible. Taking Germany as an example, after experiencing the current energy crisis, Germany plans to continue to increase the installed capacity of onshore wind power by 10 gigabytes per year after 2025. By 2030, the installed capacity will reach 115 GW; after 2026, solar energy will be increased by 22 GW per year, reaching 215 GW by 2030; by 2030 and 2035, the proportion of renewable energy power to total electricity will reach 80 % and 100%.




 

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