Daniel Yergin, vice president of S&P Global, is the author of “The New Map: Energy, Climate, and the Clash of Nations”. Carlos Pascual, senior vice president of S&P Global, is a former US ambassador to Mexico and Ukraine.
Reviews | How to Cut Russian Oil and Gas to Europe Without Causing Chaos
The sanctions imposed on Russia in February after the start of the war in particular excluded energy because it was feared that Europe was so dependent on energy imports from Russia that severing ties would lead to soaring prices, shortages and economic hardship. European public support for the concerted Western response to the invasion could be undermined.
Then came nearly two months of war – devastating attacks on civilians, the horrors revealed by the Russian withdrawal from kyiv, the impending massive battles in the Donbass region. European governments have pledged to wean themselves off Russian energy over several years; but now, amid growing revulsion at Russian President Vladimir Putin’s tactics, momentum is building for European Union energy sanctions. It has already started with Russian coal.
But gas and oil are the big money sources for Russia’s war financing. If Europe stopped shipping altogether, we calculate that it would cost the Kremlin, at current prices, more than $250 billion a year. Is it possible to do this without causing massive and destabilizing economic suffering? “Self-sanction– refineries refusing to use Russian oil, banks not providing financing – is already reducing European purchases of Russian energy. High import tariffs on Russian energy, intended to force Russia to take massive discounts to make its oil competitive, are now under discussion.
Separating Europe completely from Russian energy, however, will depend on skillfully managing energy shortages and the resulting turmoil. Achieving success requires something that has hitherto been largely lacking: collaboration between government and industry.
Politics must be set aside, along with recycled sound bites about “price gouging” that ignore the realities of global market shortages and discourage cooperation.
US and European governments must engage daily with businesses, share information, coordinate the complex logistics and supply chains of a 100 million barrels oil market per day. It is the time of war, and that means returning to the government-industry collaboration of the Second World War and the “voluntary agreementsof the Korean War andemergency committeesof the 1956 Suez Crisis, which at the time included temporary antitrust exemptions to allow the flow of critical information between government and business.
With such cooperation, sanctions against Russian oil destined for Europe could be manageable. According to our figures, about half of Russia’s 7.5 million barrels per day of crude and product exports go to Europe, meeting about 35% of total demand. President Biden’s recent announcement of a huge release of the US Strategic Petroleum Reserve was a major step to help offset shortages.
US oil production will increase significantly this year. Middle Eastern producers could add more oil quickly, but that would mean giving up on their OPEC Plus deal and overcoming tensions in US-Saudi relations. An Iranian nuclear deal, with sanctions lifted, could quickly bring more oil to market. But Russia, a party to the agreement, could no support a deal that would add competitive oil to the market.
Some of the Russian barrels rejected by Europe would be routed to Asia, but sold at deep discounts, and their passage would be hampered by sanctions, insurance and financing limits and the physical availability of vessels. Here, we must apply the lessons of the 2012-2014 campaign punishments on Iran.
Natural gas is the biggest challenge, due to Europe’s heavy reliance on pipeline delivery from Russia — normally around 35 percent of EU demand, but fluctuating up to 25%. While liquefied natural gas (LNG) has brought a lot of additional gas to Europe and with more to come, there is not enough additional LNG capacity globally or enough LNG Infrastructure in Europe to compensate for a shortfall due to the closing of the Russian tap.
Significant expansion of renewables will take years. But there are immediate measures that could reduce Europe’s gas dependence: temporarily use more coal; if technically possible, do not close the last three German operations nuclear reactors; energy conservation; behavioral changes (eg adjustment of building temperatures); and possibly some form of rationing.
These measures would be politically burdensome, especially in Germany, but as the horrors continue to emerge from Ukraine, people may accept these measures more than their leaders expect. To mitigate the economic impact, governments could take a serious look at Russian financial assets in Europe to compensate consumers and businesses.
Ten years ago, Putin denounced the shale fracking revolution, to acknowledge it like a threatens. He was right to worry. If the United States had not gone from importing 60% of its oil to becoming the first 1st producer and this year the world’s largest exporter of LNG, Europe could now be its hostage. Now Putin has revealed what a tremendous strategic asset American oil and gas is – not only for the United States but also, in this deepening crisis, for Europe.