Refueled

Russia’s war against Ukraine and its weaponization of energy has ushered in a global energy crisis of “unprecedented depth and complexity,”^[1] with Europe at the very heart of it. Perceptions of Russia as a reliable energy partner have been torn to shreds. And energy ties between Russia and Europe will be permanently severed. The result is a major reshuffling of international energy trade flows, increasingly reflecting geopolitical fault lines rather than market logic. The securitization of energy will not stop with the hydrocarbon age, but extend to a greener future. Since China occupies a dominant position across clean- energy supply chains, Beijing is at the center of liberal democracies’ concerns about new vulnerabilities emerging with the shift to renewables. And as a key to future prosperity, green technologies are a central component of the growing geopolitical competition between China and the US and its partners.

For decades, European energy relations with Russia, heavily driven by Berlin, were based on two fundamentals: the logic of the lowest price and the belief that Moscow would remain a reliable energy partner even in a context of worsening relations with the West, with energy providing a “bridge” for improving political ties. Although decision-makers and experts in Europe and partner countries voiced strong concerns about Russia’s energy dominance in Europe, fossil fuel dependencies increased further. This was the case even after Moscow’s annexation of Crimea. Between 2005 and 2010, Russia accounted for 30 percent of European natural gas imports on average. Between 2015 and 2020, this figure stood at 40 percent.^[2] Russia’s invasion of Ukraine and full-scale energy warfare against Europe brutally exposed the fallacies of an energy policy guided by liberal market logic and destroyed beliefs in the political value of deep energy ties with the Kremlin. The close energy relations did not “draw Russia into the democratic fold of its Westerns neighbors,” but instead rendered liberal democracies vulnerable to the Kremlin’s revisionist agenda.^[3] The risk of losing its main export market did not prevent Moscow from using energy as a weapon against Europe. And given the weight of Russia in international energy markets as “the world’s largest exporter of fossil fuels,”^[4] Western partners have struggled to exert pressure on Moscow by imposing sanctions on its hydrocarbons.^[5]

In the months before its invasion of Ukraine, Russia had already prepared the ground for its ensuing energy blackmail. Despite high demand, Russia held back “at least one-third of the gas it could [have] sent to Europe.”^[6] Two months after the invasion, Moscow then began cutting off gas deliveries to Bulgaria and Poland, and progressively reduced supplies to Europe over the summer. By November, Russian pipeline gas flows to Europe had nearly ceased.^[7] Coming on top of already tight energy markets, Russia’s curtailment of gas supplies and Western sanctions on its oil and coal exports sent shockwaves across global energy markets, hitting Europe particularly hard.

Natural gas prices reached record levels in August, with prices about ten times higher than their average level over the past decade.^[8] Electricity prices tripled in the first half of 2022.^[9] Across Europe, governments massively intervened in gas and electricity markets^[10] and ratcheted up support to shield households and industries from the impact of rising prices.^[11] So far, concerns that Europe’s reliance on Russian energy would dilute its response to Moscow’s aggression have not materialized, and Western partners have remained largely united. Yet worries about the risk of social unrest, growing friction within the EU, and eroding support for Ukraine remain. Although prices are down from summer highs and Europe’s gas storage has been refilled, the crisis is far from over. Energy prices will continue to remain high, and European competitiveness is under increasing pressure.^[12] As the IMF put it, “[w]inter 2022 will be challenging for Europe, but winter 2023 will likely be worse.”^[13] The EU is still struggling to find a joint approach, as illustrated by the months-long negotiations over a gas price cap.^[14] And national responses such as Germany’s 200 billion euro economic “defense shield” have provoked criticism for undermining EU solidarity and distorting the internal market.^[15]

The ripple effects of Putin’s energy warfare extend far beyond Europe. Across low-income countries, elevated energy prices are a key factor for surging food insecurity and extreme poverty, especially in sub-Saharan Africa (Chapter 4).^[16] And as Europe rushed to replace Russian pipeline gas, it outbid states in Asia for spot supplies of liquefied natural gas (LNG), leading to energy shortages and widespread power cuts in countries such as Pakistan and Bangladesh.^[17] Since markets will remain tight over the coming years, the “scramble for fuel” will continue. This risks sowing discord between Europe and low-income countries and weakening the global front against Moscow’s aggression.

The severed energy ties between Russia and Europe are unlikely to be mended. This is prompting a major reshuffling of fossil fuel trade flows, with Russia turning to the Chinese market, and Europe increasing its imports from the US. The post-invasion energy map will thus increasingly reflect geopolitical fault lines, even if it will not neatly represent the democracy–autocracy divide: Middle Eastern countries will be key exporters to both Europe and Asia. And for the time being, LNG shipments from Australia and the US to China are likely to continue.

As energy trade flows between Russia and Europe will largely cease, Moscow will shift its supplies eastwards. Yet the gains in oil and gas markets in Asia will not be able to make up for the losses in exports to Europe (Figure 5.1). While the soaring energy prices in the months after the invasion led to windfall revenues for Moscow, filling its war chest with 228 billion euros by November 2022,^[18] in the longer term, the energy war that Russia started will leave the petro-power in a much-diminished position in international energy. Compared to prewar estimates, Russia’s share of global oil and gas trade is bound to halve by 2030.^[19] This diminished role extends beyond the fossil fuel age, as Russia’s hydrogen ambitions are also faltering.^[20]

With oil flows to Europe phased out, Russia is turning to Asian markets. Profiting from heavily discounted prices, imports by China, India, and Turkey have surged.^[21] Not all Russian barrels will find a new home though.^[22] According to the IEA, by the mid 2020s, oil exports by North America will supersede those of Russia, while it is Middle Eastern exporters that will fill most of the gap left by Moscow.^[23] China and India will heavily drive oil demand, and Middle Eastern countries will meet large shares of it (Figure 5.1). The Middle East will thus gain further strategic importance for China and India, with energy relations driving closer political and economic ties.^[24] This is illustrated by major Chinese investments through the Belt and Road Initiative in the Middle East, with Saudi Arabia as the single-largest recipient in the first half of 2022.^[25] Amid a declining US presence in the region, liberal democracies’ concerns about China’s rising influence are growing. The deepening ties between China and the Middle East might evolve to include a stronger Chinese military and security footprint, potentially undermining the West’s security partnerships with countries in the region.^[26]

Further strategic challenges for the US and its partners arise with regard to the rising share of global oil production by members of the Organization of the Petroleum Exporting Countries (OPEC).^[27] The current energy crisis shows that even the US as a net exporter cannot insulate itself against the vagaries of global oil markets and the steps taken by major producers.^[28] The September 2022 decision by OPEC+ to cut production, largely driven by Saudi Arabia, was met with fury in Washington, DC, which feared increasing prices and interpreted Saudi Arabia’s move as siding with Russia.^[29]

As with oil, Russia is shifting its gas flows to Asia. Yet at least in the short term, it will be much harder for Moscow to make up for its losses in the European market. Building the necessary pipeline infrastructure will take at least a decade.^[30] And new LNG projects in the Arctic rely on foreign technology and financing, now sanctioned by Western partners.^[31] China will be a major importer of Russian gas, but supplies are still a fraction of the former volumes to Europe.^[32] While this could change with a new pipeline project, it remains unclear whether and under what conditions China “will make the deal.”^[33] Given Moscow’s increasing reliance on the Chinese market, Beijing will set the terms while seeking to avoid overdependence on Russia.^[34] For pipeline gas, China might deepen ties with Central Asia; for LNG, it is boosting domestic production and diversifying its imports, including by scaling up volumes from Qatar.^[35] Despite the geopolitical tensions, China has also been increasing LNG imports from Australia and the US. Combined, this accounts for around half of Chinese imports, providing Australia and the US with potential leverage.^[36]

With new LNG projects coming online in the next few years, the US will further strengthen its position as a global LNG provider. Desperate for alternatives to Russian gas, Europe has ramped up LNG imports from the US and is heavily investing in new import capacity. In light of the uncertain political trajectory of Washington, DC, the asymmetric transatlantic energy relations bring their own challenges for Europe.^[37] Europe’s “dash for gas” goes beyond US LNG, with European leaders seeking to conclude new LNG and gas pipeline agreements with countries in the Middle East and Africa.^[38] Given the questionable democratic credentials of some potential suppliers, and often high political instability, Europe faces difficult political trade-offs and continued supply risks. For potential exporters, Europe’s decarbonization goals make longer- term contracts and investments unlikely; new gas infrastructure thus risks creating stranded assets.^[39] Until recently, based on their climate agendas, European leaders had advocated to stop overseas fossil fuel projects. But at the same time, they have failed to scale up support for green energy in low- income countries. As European leaders are now turning to fossil fuels from developing countries, they are facing allegations of hypocrisy for having denied these developing countries access to electricity while now using their resources “to keep the lights on in Europe.”^[40]

Notwithstanding the initial rush for fossil fuels,^[41] in the medium to long term, the crisis is likely to accelerate rather than slow down the path to net zero.^[42] As the world weans itself off fossil fuels, green energy is gaining in strategic importance. And while the transition to renewables allows liberal democracies to reduce hydrocarbon dependencies, new vulnerabilities are emerging. Given China’s position as “kingpin” of clean-energy supply chains,^[43] Beijing is at the center of concern for the US and its partners.

The great potential for renewable energy around the world should allow countries to diversify. Yet green supply chains carry their own risks. This is also the case for hydrogen. Considered as one of the keys to decarbonizing industries and thus future economic competitiveness, momentum behind hydrogen is growing. Since it is technically possible to produce green hydrogen in nearly every country, there should be an increasing number of actors joining the market over time (Figure 5.2).^[44] For regions such as Europe that will not be able to produce enough hydrogen themselves, this opens up diverse options for trade. Countries such as Chile, Namibia, and Morocco will emerge as new export powers. Yet in some cases, old suppliers will also be the new ones. Building on favorable resource endowments and existing energy infrastructure, Australia and Middle Eastern countries are pursuing ambitious hydrogen strategies.^[45] Since North Africa and the Gulf region are well placed to export hydrogen to Europe, European leaders face the question of whether they want to yet again deepen energy ties with autocratic countries.^[46]

Building on its long-term industrial strategies and prime access to CRMs, China occupies a “key manufacturing node” in clean-energy technologies.^[55] By 2020, ten Chinese firms were among the top 15 wind turbine manufacturers.^[56] In EV batteries, China accounts for three quarters of global production.^[57] And China’s share in all the manufacturing stages of solar panels exceeds 80 percent, and is expected to rise further.^[58] In the EU, solar panel imports have skyrocketed since Russia’s invasion of Ukraine; China makes up 90 percent of them.^[59]

Thus, to achieve their renewable energy targets and assume credible climate leadership, liberal democracies will have to rely on Beijing.^[60] This reliance raises concerns not just about geopolitical vulnerabilities and economic competitiveness, but also human rights, as key components for EV batteries and solar modules are produced in Xinjiang.^[61] For China, its outsized role in green energy will reduce the country’s own energy import risks and provides Beijing with political leverage and a head start in what is to be a “multi-trillion-dollar” clean-technology market.”^[62]

To reduce reliance on China and foster US competitiveness, Washington, DC has responded by announcing significant subsidies for clean technologies as part of the Inflation Reduction Act (IRA). While the IRA has been applauded as a major push for the US climate agenda, domestic content requirements to qualify for subsidies have raised concerns about potentially slowing down the uptake of green technologies and provoking trade frictions with US partners.^[63] Fearing it will lose out against US and Chinese industrial policies, EU plans to relax state aid rules and scale up public funding for clean technologies are gaining traction.^[64]

The increasing alignment of security, climate, and economic goals could be a catalyst for the climate agenda. Yet as security and industrial policies are increasingly driving climate and energy approaches, trends toward protectionism are intensifying. Localizing supply chains might help reduce dependencies, but trade has been essential in bringing down costs of renewables and preserving flexibility in energy markets.^[65] Energy is exemplary of economic relations in times of growing geopolitical tensions, with security rather than liberal market logic increasingly shaping policy, and government interventionism rising. But more fragmentated energy markets come with risks not only for economic growth, but also for the path to net zero and energy security.