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Geopolitics have always mattered when it comes to energy. No commodity as central to the economic wellbeing of countries can ever be divorced from the tides of political events. But, with the Russian invasion of Ukraine, geopolitical factors are shaping energy flows and investment more directly than they have done for some time, cementing new trading patterns and redefining energy security concerns. In a world already undergoing seismic change because of climate concerns, the ripple effects will be material.
The invasion of Ukraine is a watershed event that is destined to mark the beginning of a new era of global politics: a post-post-Cold War. The first major land war in Europe since 1945 has revived a Western security alliance that had decayed as it searched for relevance after the fall of the Soviet Union; heightened concerns about the political and economic vulnerabilities of globalized supply chains; and accelerated the regionalization of the global order as U.S.-China divisions have widened.
In the energy sector, it has prompted greater political intervention into how and where hydrocarbons are bought and sold, and at what price. Sanctions, curtailments, G7 price caps and the notion of “good” and “bad” barrels and molecules (based on the political orientation of the producer) all mean that politics, rather than markets, are increasingly determining the flow of oil and gas. That Russian Urals-grade crude, shipped from Baltic and Black Sea ports, is overwhelmingly heading to markets in Asia at heavily discounted prices is not the market at work; it is the result of overt political decisions. LNG flows into Europe are guided by a similar logic. With no immediate end to the Russo-Ukrainian War in sight, this erosion of market pressures is likely to persist, and the traditional stickiness of energy markets means that the new flow patterns will become increasingly cemented.
A muddled world
Greater political intervention is also clouding investment signals in an energy sector already ruffled by the challenges of energy transitions. Uncertainty over energy transition policy, over shareholder and stakeholder sentiment, and over the cost and availability of capital were already muddying the long-term investment picture for hydrocarbons and renewables alike. Now investors face heightened political uncertainty as well.
At the heart of the challenge is governments’ prioritization of energy security since the Russian invasion and – more importantly – the fact that the term is defined differently by different states and regions. To Europe, energy security is now about sustainability of supply, as decarbonization has become synonymous with self-sufficiency, with the shift to renewables easing the continent’s dependence on hydrocarbon imports. To the United States, the phrase is about ensuring low-cost energy supplies, whatever their nature. For India and China, the concept is defined differently still, in terms of reliability as well as cost.
These distinctions foster a “catch-is-as-catch-can” approach to energy security. Moreover, they make multilateral coordination on long-term energy and climate policy – already an onerous task given the economic, social and political disparities between the industrialized world and the global majority of developing states – virtually impossible. What remains is a patchwork global investment environment that is deterring energy companies both from making much-needed investments into the hydrocarbons needed to at least moderate the disruptions of energy transitions, and from investing sufficiently into renewables and new energy systems that will ensure that long-term climate and emissions goals are met.
- Politics, rather than markets, are increasingly determining the flow of oil and gas
- Governments/blocs pursue unharmonized ‘energy security’ strategies
- Strong green investment also is bridled by geopolitics, protectionism