When there is trouble in the world, the price of oil soars. It happens at least once a decade, and sometimes more, such as during the 1970s, when wars and revolutions in the Middle East led to a collapse in production in the region.
Once the extent of the western reaction became clear, it was inevitable that Russia’s attack on Ukraine would create wild price spikes in oil and gas, and other commodities. Crude oil prices hit $139 a barrel this week, their highest level in more than 14 years, and gas prices surged, too – and that was before the US declared its complete ban on imports of Russian oil, liquefied natural gas and coal, and the UK confirmed that it would follow suit, albeit in stages. The US’s ban was not a difficult decision as it only imports around 3 per cent of its requirements from Russia. The UK imports more but it is still a good deal less than the EU, which is highly dependent on its eastern neighbour and whose hands are therefore largely tied. Russia supplies around 40 per cent of the EU’s gas supplies and more than 25 per cent of its oil. It is not an impossibility that Russia itself will cut off the supply of gas to Europe, which would cause even more powerful shockwaves.
But what Putin’s warmongering is achieving besides a humanitarian crisis, the wilful destruction of a nation, and the creation of a new iron curtain, is an iron-willed determination by the west to end its reliance on Russian hydrocarbons. Hardly anyone wants them now, or will want them even when this war ends. The danger of that dependency has been exposed. The EU has indicated that its intention is to drastically reduce its Russian gas imports by around 80 per cent within a year. The gap will be filled by imports of liquified natural gas, and a speeding up of investment into renewables. The UK too is ploughing ahead with its own self-reliance plans, which includes new North Sea licences being signed off and plans for much greater use of nuclear and renewables.
Increasing nations’ self-reliance is key to solving two of the world’s biggest problems: energy security and CO2 emissions. A world without energy security is at permanent risk of recessions; a world belching out harmful emissions is under permanent threat of self-destruction.
Reducing imports from Russia will happen therefore at some point. Of course, the faster those contracts are cut up, the greater the impact will be on Russia’s economy, which almost certainly means storing up new problems for the future. That is the least of it, though. The world may be committed to ending its reliance on fossil fuels but as Mark Robinson pointed out in his recent Alpha report on energy, achieving zero reliance on hydrocarbons remains a monumental task: according to the BP Statistical Review of World Energy (2020), wind- and solar-powered sources accounted for 3.3 per cent of all the energy (electricity, transportation and heating) generated globally in the year prior to the pandemic while fossil fuels accounted for 84.3 per cent of energy inputs.
Secure, reliable energy supplies at stable prices are required. The intention is for renewables to completely replace fossil fuels but given the level of demand, the time and cost of building the right sort of infrastructure, that cannot happen for a number of decades.
What should investors make of all this? First that there can be little doubt that the current conflict will lead to a redoubling of efforts to achieve self-reliance through renewables, certainly in the UK and the EU.
Second, that Russia’s invasion has increased the risk of much higher inflation, at least in the short term. This war could be a trigger for recession as resource price shocks hurt households and businesses. The chancellor might have been looking forward to managing an economy in “ordinary” times but that looks like it has slipped his grasp once again. He may even end up needing to deliver further packages of relief.