Blog Post

Russia and Ukraine: The Energy Dimension

Mar 5, 2014 | Joel Darmstadter

Source: BP

Russian incursion into Crimea, potential counter-measures by the United States and other Western countries, and retaliatory Russian responses to such counter-measures have, unsurprisingly, spotlighted the role of energy in the conflict. In the case of oil, Russia, it is accurately noted, is the world’s largest producer and second ranking exporter (behind Saudi Arabia). In the case of natural gas, it ranks second in production (behind the United States) and first in exports. This dominance leads to fears that Russia will manipulate energy supplies as a foreign policy weapon against Ukraine or the West generally—something it has done before, albeit on a smaller scale. The crisis has even injected possible Russian energy maneuvers into an ongoing US debate about whether to lift restrictions on American oil exports and speed licensing of LNG (liquefied natural gas) exports – the point being that such actions could frustrate, at least to some extent, any attempt by Russia to use its energy dominance for political gain.

Are these fears reasonable, and, if so, can US energy policy help?

Of course, for Russia to even contemplate such action, the country must be willing to forfeit the export proceeds on which it is significantly dependent. But beyond that, to pursue such a supply-curtailment scenario, a sharp distinction must be made between oil and gas. Oil is a globally-fungible commodity and, as the events of the 1973-74 oil crisis demonstrated, deliberately withholding oil from embargoed buyers, but not others, has little effect—all it means is that embargoed countries must buy from other suppliers. Of course, Russia could withdraw oil from the market entirely, rather than just restricting who may buy it, but unless the withdrawal is very large (and therefore very costly to Russia), there may be sufficient worldwide surplus capacity to offset it.

Natural gas is a different matter. As Mr. Putin demonstrated in 2006 and again in 2009, a deliberate reduction in natural gas exports victimized not just Ukraine (his primary target) but European countries further west at the end of the gas pipeline. Unlike the interconnected world oil market (then and now), the global natural gas network remains highly fragmented. The graphic above, from BP’s 2013 global energy review, vividly points out both this global fragmentation and the conspicuous importance of Russia’s pipeline exports. While, in years to come, expanded LNG shipments from the United States, Qatar, Australia, and other countries will undoubtedly result in the creation of a worldwide gas trading system, blunting would-be supply manipulation, for now, the natural gas card remains a conceivable option for Mr. Putin to play.

What factors may prompt him to move in this direction and what reactive strategies it would provoke on the part of affected countries takes us into the political consequences of the ongoing upheaval. Here, my sole purpose was to simply illuminate some of the lurking energy issues.

But, reverting to the ongoing US domestic debate, keep in mind that, for the United States to become more than a trivial oil exporter and a significant LNG exporter takes time. In the latter case, that reflects also the sizable associated infrastructure that is required. This means that, whatever the benefits of lifting US oil-export restrictions and accelerating the LNG-export approval process, neither action seems likely to have a decisive impact over the next few years, much less on current events playing out between Russia and its Ukrainian neighbor.