Wielding the Energy Weapon: Differences Between Oil and Natural Gas

Executive Summary

The Russian invasion of Ukraine has triggered renewed focus on the use of energy resources as geopolitical “weapons.” But the experiences for oil and natural gas — Russia’s two main energy exports, and the leading energy sources for the EU and U.S. — have followed markedly different paths over the past year. Russia has tried to use natural gas as a weapon, hoping that the EU’s dependence on its gas will make the latter less supportive of Ukraine. At the same time, the EU, the U.S., and their allies have used oil sanctions in hopes of constraining Russia’s military actions in Ukraine. The contrasting strategies arise from each side’s perception of leverage, which is in turn a function of differences in how oil and gas are accessed, traded, and used (including the availability alternatives), as well as a host of other factors.

Both plans have failed to deliver — so far, at least — the results that the parties deploying the “energy weapon” expected.

• Dependence on oil as the leading energy source (without an immediately viable substitute) in the U.S. and the EU, along with the global nature of the oil market, have severely constrained Western options to restrict Russian oil revenues. Strategic backstops in the form of OPEC spare capacity and Western emergency stockpiles provided less flexibility than hoped for. The best that Western sanctions could accomplish was an effort to make permanent discounts on crude oil that Russia was already offering to find new markets (and to extend those discounts to refined products).
• For natural gas, reduced demand (through emergency actions, warm weather, and price-induced demand destruction), and alternative supplies allowed Europe to survive the winter of 2022-23 without a full-blown energy crisis, although it did have to pay steep prices for fuel. Ironically, a lack of flexibility in export options meant that Russian natural gas not sold in Europe has been largely unable to find new markets elsewhere.

As the turn of events since the Russian invasion of Ukraine demonstrate, perceptions of geopolitical energy leverage have largely proved to be either inaccurate or incomplete. This is partially due to a misreading of market and trading structures: Profit motives can incentivize large and rapid changes in the behavior of producers and consumers alike. Additionally, events beyond the control of either side in the conflict loom large and could create a false sense of security. For Europe, the short-term win was due to factors like mild winter weather and being able to ramp up purchases of liquefied natural gas because a recession in Asia dampened demand. But these are not long-term solutions, and hoping for another warm winter is not a strategy.

Future adjustments by both sides may alter their perceptions and actual vulnerability to the use of energy as a weapon. Russia is working to develop new natural gas markets beyond Europe, and climate policies are likely to reduce European and U.S. dependence on oil and natural gas over time. But in the near-term, the critical importance of oil and natural gas in the energy mix means that the possibility of employing energy as leverage will remain a geopolitical reality.

A War on Two Fronts

The Russian invasion of Ukraine has triggered renewed focus on the use of energy resources as geopolitical “weapons.” But the experiences for oil and natural gas — Russia’s two main energy exports, and the leading energy sources for the EU and U.S. — have followed markedly different paths over the past year. Why? And what lessons can policymakers learn from these experiences?

Energy can potentially be used as a weapon on both sides of the supply-demand equation. While a wide range of factors feed into the discussion of energy “vulnerability,” the literature on geopolitical leverage indicates that the side more dependent on the other for either supply or demand may be more vulnerable to geopolitical meddling.[1] Unsurprisingly, the less dependent side is more likely to wield the “energy weapon.”[2] However, the relationship is extremely complex. It involves both domestic and international-level factors that need to be taken into account by any country seeking to use energy to influence others, such as domestic political support or alliances and its dependence on other countries. In addition, a perceived advantage does not guarantee actual control over outcomes. The experiences of Russian oil and gas since the invasion of Ukraine illustrate both the opportunities and pitfalls countries face when trying to using energy flows for geopolitical purposes. Since levels of dependency are rarely static, any analysis needs to consider that theoretical leverage may not turn into a real advantage under certain market, political, or even weather conditions — and prepare accordingly.    

Oil and Natural Gas in the Pre-February 2022 Energy Mix

Before the Russian invasion of Ukraine, oil was the largest energy source globally (accounting for 31% of global energy use), as well as in the EU (35%) and the U.S. (38%). Natural gas is the third-largest fuel globally (24%, behind coal at 27%), and the second-largest within the EU (24%) and U.S. (32%).[3]

Oil (including crude oil and refined products) and natural gas were also Russia’s largest energy exports, and Europe was the main market for both. Russian crude and refined products respectively accounted for about 30% and 38% of total European oil imports. For natural gas, Europe’s dependence on Russian trade was even greater, with Russia accounting for about 40% of the total natural gas imports into Europe (including both pipeline and LNG trade) and 54% of non-European trade.

At the same time, Russia was highly dependent on Europe as an export market. Three-quarters of Russia’s natural gas exports (including 83% of pipeline exports) and over 50% of its exports of crude oil and refined products went to Europe.[4]

What Happened? Natural Gas

Russia began wielding the energy weapon well before the February 2022 invasion.

• Gazprom, the Russian, majority state-owned energy corporation, reduced natural gas deliveries to Europe in 2021 by constraining gas flows to contracted volumes only at a time when there was an increase in demand related to post-COVID recovery.
• In addition, instead of filling Gazprom-owned storage in Europe in preparation for increased demand over the winter season, Gazprom allowed that storage to drop to record-low levels.[5]

Following the invasion, Russian deliveries of natural gas to Europe dropped further, far below contracted levels with only the TurkStream[6] pipeline operating at normal (often maximum) levels (see Figure 1 for data on changes in exports 2021-2023). For other pipelines, the figures are quite different:

• Since May 2022, after a Polish refusal to pay for Russian gas in rubles and Russian sanctions that followed, no gas has been transported via the Yamal pipeline.
• Nord Stream 1, which would normally run at its maximum capacity to bring in excess of 55 billion cubic meters of natural gas (bcm) to Germany, has been completely out of operation since pipeline explosions in September 2022.
• While the transit line through Ukraine still carries some gas from Russia, the flow is at extremely low levels (10-15% of the maximum flows in 2015-2020 via this route).

It is important to note that volumes not sent to Europe cannot be rerouted anywhere else as the necessary pipeline or liquefaction infrastructure is lacking. Because of this, Russia has been filling its own storage to the brim and shutting down production. Even so, the extremely high prices of gas in Europe meant the much lower amount of Russian gas flowing to Europe did not translate into lost profits until late 2022, after the Nord Stream pipelines were put out of operation. According to Gazprom’s official financial results, it earned record profits in the first half of 2022.[7] In addition, Russian exports of liquefied natural gas (LNG) to the EU have increased in a significant manner, sold mostly by a non-state Russian company, Novatek.[8]

 

Figure 1 — Russian Gas Exports to Europe 2021-2023

 

 

As a result, EU imports from other suppliers surged. This included Norway, which became Europe’s (the EU and U.K.) largest natural gas supplier at 122 bcm in 2022 — the highest levels ever recorded and almost 6% higher than in 2021.[9] In addition, Europe has leaned much more heavily on liquified natural gas, with a 65% increase in imported volumes year over year, most of it produced in the U.S.[10] That substitution for Russian gas led to the highest natural gas prices ever experienced in the EU, and as a result, electricity prices also soared.

In the end, regulatory measures mandating high gas storage levels, demand cuts, and mild weather allowed the EU to make it through the winter without imposing emergency rationing or experiencing actual shortages. This year natural gas prices have also fallen precipitously, although they are still higher than the long-term average (before 2021, see Figure 2).

 

Figure 2 — Weekly Title Transfer (TTF) Price From December 2012 to April 2023

 

 

What Happened? Oil

After the invasion, oil prices (which had been rising amid a tightening global market) spiked amid fears of a disruption of Russian supplies, including the risk that Russia might cut supplies as it did for natural gas. Importantly, this spike came amid a more general tightening of global oil market conditions — a function of post-pandemic demand recovery and aggressive production cuts by OPEC and cooperating non-OPEC countries known as the OPEC+ group (which, significantly, includes Russia), which were in the process of being unwound in the run-up to the Russian invasion. Even though Russian production and exports were not materially impacted in 2022 (as discussed below), crude oil prices registered one of the largest (absolute) increases on record, with Brent rising by $30 (over 40%) to $101 per barrel.[11]

Several countries, including the U.S. and U.K., initiated embargoes on Russian crude oil and refined products, but those countries were not large importers of Russian supplies to begin with. A larger problem for Russia was that a number of Western energy companies and trading houses began to “self-sanction” by refusing to do business with Russia. This in turn forced Russia to offer large discounts on crude oil exports to find new markets, especially in India but also in Turkey and China (see Figures 3 and 4).

 

Figure 3 — Prices of Dated Brent Versus Urals Blend

 

 

But soon the action turned to the Western allies trying to apply the energy weapon against Russian oil — with a twist. Because Western leaders were deeply concerned about the risks that lower Russian oil exports could pose to prices and therefore to economic growth, their focus quickly turned to methods that would maintain Russian oil exports while denying Russia the revenues.[12]

After much negotiation, eventually an EU embargo was put in place in December on most Russian crude oil purchases along with a G7 price cap of $60 per barrel. This was followed by similar measures in February for refined products (with caps of $100 and $45 per barrel, respectively, for “high-value” and “low-value” products).[13]

Rather than an outright ban on oil sales with financial sanctions (akin to the Joint Comprehensive Plan of Action (JCPOA) sanctions on Iran), Western allies instead instituted bans on their own purchases of Russian oil, combined with a price cap for any Russian oil sold elsewhere that used G7/EU services, including shipping and insurance. These caps allowed countries including India, Turkey, and China to sustain their earlier increases in purchases of Russian oil while locking in heavy discounts.

Other producers including Saudi Arabia reacted harshly toward the price caps and embargo, arguing that the sanctions played a role in pushing global oil prices higher, but also clearly assessing that a price cap mechanism — if successful — could potentially be used against them in the future. 

While the self-sanctions and subsequent EU/G7 sanctions have led to a massive adjustment in global crude and refined product flows, there has to date been little impact on overall Russian export volumes, and world crude oil prices this year have fallen below pre-invasion levels. Indeed, Russian oil revenues increased in 2022 as exports actually grew slightly, and a large increase in global crude oil prices offset the discounts offered on Russian crude blends.[14] Note, however, that Russian oil (and natural gas) revenues have fallen sharply this year, with the oil revenue decline largely driven by lower crude and refined product prices.[15]

 

Figure 4 — Russia Crude Oil Exports by Country

 

 

Despite Russian threats not to sell oil under the sanction regimes, its output and exports remained steady. After the refined products embargo/price cap was instituted earlier this year, Russia announced a plan to reduce output by 500,000 barrels per day  in March, and subsequently joined the April Saudi-led initiative for additional voluntary production cuts from members of the OPEC+ group. Opinion among analysts remains divided over whether Russian cuts were forced by the new sanctions on refined product exports impacting Russian refinery operations, or were voluntary — at the time of writing it’s too soon to tell how much output has fallen or whether any production cuts will prove durable.

Why Did Things Play Out Differently?

The situations described above show that while Europe and the U.S./G7 were the initiators behind a redirection (if not cuts) in Russian oil flows, the opposite is true for natural gas; it was Russia that took the initiative. Why?

The difference can be explained by the leverage each side perceived it had with regard to each resource. This leverage is determined on the basis of trade flows (see Oil and Natural Gas in the Pre-February 2022 Energy Mix above) as well as a number of complex factors, some of them uncertain or unpredictable, which complicated both sides’ exercise of their perceived leverage. 

What factors have contributed to the different approaches to Russian oil and natural gas trade and the different pathways these resources have followed after invasion of Ukraine? 

Oil Is a Global Market; Natural Gas Is Not

If Russia cut oil supply, the move would have reverberated immediately around the globe, hurting not only Europe and the U.S., but also key actors like China and India — both large oil importers and both not as unequivocally hostile to the Russian invasion of Ukraine as Europe or the U.S. Instead, the U.S. quickly moved to ban purchases from Russia, and the EU eventually imposed an embargo on Russian crude oil and refined products (after months of delay to allow its companies to plan). The fungibility of global oil meant that “missing” Russian oil in Europe and, to a much lesser extent, the U.S. would be relatively easy to replace with oil from other sources – and that Russia would be able to find new markets (see Figure 5).

 

Figure 5 — Russia Crude Oil Exports by Destination: 2021-2022

 

In contrast, natural gas trade is more regional, with only a fraction of flows flexible globally. LNG supply — the portion of natural gas trade that can be arbitraged between continents — only recently came close in global volumes to international flows via pipeline, and remains a much smaller share of globally traded supply and demand than oil.[16] Additionally, due to LNG being much more complex to transport, its flows are limited to places where costly infrastructure already exists.

In Europe the existing pipeline trade — which pre-invasion accounted for more than three-quarters of imports (most of them from Russia) — has historically limited the expansion of LNG trade. Notably, this includes Germany, Europe’s largest natural gas market, which predominantly relied on Russian fuel and had no access to LNG before the Ukraine invasion and subsequent cuts in Russian gas supply. Russia appeared to assess that it could impose significant costs on the European market by reducing pipeline exports to Europe in a targeted way, costs that would push Europe to go along with Russia’s desired outcomes in Ukraine.[17] Although Russia relied on Europe for most of its natural gas exports (and their revenues), Russia calculated that Europe needed its gas to keep the lights and heat on, and so was prepared to risk some of its revenues[18] to seek the result it wanted in Ukraine.

As noted earlier, despite reduced flow volumes, Russian revenues from natural gas remained at stable levels well into 2022 as European prices soared. At the same time, the spike in LNG prices was manageable for China and India (although it caused significant distress for other emerging-market LNG customers): due to weak domestic demand and/or the availability of cheaper substitutes such as coal, both countries took the opportunity to sell their contracted LNG volumes to Europe at a tremendous markup. 

Oil Has Strategic Backstops; Natural Gas Does Not

But Oil’s Strategic Stockpiles Only Go So Far. Oil has been a focus of energy security policy since the Arab oil embargo 50 years ago, and a substantial set of backstops have been developed. The effectiveness of these programs, however, was to some extent constrained in the current crisis.

Strategic stockpiles (of crude oil and refined products) are held by International Energy Agency (IEA) member countries as well as China and India — the pre-invasion stockpile was roughly 1.5 billion barrels by IEA members alone. (China’s strategic stockpile is large but not publicly reported.) Following the invasion of Ukraine, IEA members announced the largest coordinated withdrawal of strategic stock in the organization’s history. The IEA reports that government-owned inventories among its member countries were reduced by 267 million barrels in 2022, of which roughly 220 million barrels came from the U.S. strategic petroleum reserve (SPR).

But the release of strategic stocks had limitations. In a global marketplace, strategic stocks cannot be targeted to a specific country; indeed, the U.S. administration was criticized when Chinese companies bought a small amount of crude oil in the Energy Department’s SPR auctions. And the role of IEA member countries has changed dramatically over time as well: When the group was founded, OECD countries (largely IEA members) accounted for nearly three-quarters of global oil demand, a share that has fallen to about 45% currently. Other oil-consuming countries with strategic stockpiles (such as China and India) did not participate in the coordinated release. 

Additionally, while many countries hold strategic stocks of both crude oil and refined product, the U.S. SPR — which accounted for roughly three-quarters of the IEA’s stock release last year — holds only crude oil. Constrained global refining capacity, and other factors including Chinese export quotas for refined products, made prices for refined products spike more sharply than crude oil.

Another key dimension of the long-standing global oil security framework is spare production capacity, especially in OPEC heavyweights Saudi Arabia and the UAE.[19] At the time of the invasion, the U.S. Energy Department estimate was that OPEC Middle East countries held 3 million barrels per day of spare production capacity. Saudi Arabia is unique in the marketplace for having invested in maintaining a buffer of spare capacity as its contribution to global oil security. But while the OPEC+ group did raise production in the months following the invasion (as part of a plan they had adopted earlier), they did not respond to requests from the U.S. and other oil-consuming countries to accelerate those production increases.[20]

In the past decade, part of the oil security plan for the U.S. (and oil consumers globally) came from the rapid investment and scale-up of shale oil production as oil prices rose. For a variety of reasons, the price response of shale oil production was muted compared to previous price spikes in the past decade.[21] 

Gas has Issues With Storage and Transport. For natural gas, no such strategic programs exist. There is no strategic storage (or IEA-like treaty mechanism to coordinate the release of stocks between countries), and no strategic buffer of spare production capacity. Only after the Russian invasion did the EU impose commercial storage mandates requiring gas storage to be 90% full by November 1, 2022. Additional country-level measures were also established, including a requirement for German storage to be 95% full by November 1, 2022.[22]

It should be noted that European natural gas storage is not uniformly distributed among countries: Germany and Italy own nearly half of the EU’s total storage capacity while Cyprus, Estonia, Finland, Greece, Ireland, Lithuania, Luxembourg, Malta, and Slovenia have no gas storage facilities at all. Even though the latter nations have  signed solidarity agreements with other EU countries, such agreements are yet to be tested, and pipeline interconnectivity is not always sufficient to ensure effective balancing of the market.

A further restriction on the strategic response to Europe’s natural gas crisis is that both European LNG intake capacity and U.S. LNG export capacity were limited. Availability of U.S. LNG was reduced by an industrial accident at Freeport LNG in Texas, taking it out of commission from June 2022. While Freeport LNG has restarted now, the availability of completely new LNG supply is not going to increase significantly in the near future, as it takes several years to bring on additional U.S. LNG facilities. Even the new LNG import infrastructure under construction will not necessarily mean access to more gas for the EU. While there is a record-breaking buildup of floating liquefaction and storage units in Germany, only very limited volumes of new LNG supply will enter global markets in 2023 and 2024. Additionally, if China’s economy picks up, access to LNG supply may be even more constrained than it was in 2022, when Chinese companies were happy to make profits from the LNG they had purchased on a contract basis by re-selling it to Europe at a higher price.

Other Factors Cut Both Ways

Several other factors also made a difference in the story lines for oil and natural gas and geopolitical leverage during this crisis.

Ability to Substitute. Even though Europe was heavily dependent on Russia as source of natural gas, its ability to cope with the reduction in Russian natural gas deliveries was aided by the availability of substitutes for power generation via its rapidly-growing renewables output and the use of coal — as well as the delay in closing Germany’s nuclear plants. Europe was also able to buy additional LNG, albeit at a high cost, from China and India; the sellers were able to profit from this while meeting their countries’ own domestic power requirements through increased use of coal, diesel fuel, and renewables. 

Although Europe has had more ways to substitute Russian oil by buying from other crude sellers, it has been limited by the fact that oil has fewer demand substitutes, at least in the near term. Whereas natural gas accounts for less than a quarter of the energy used to generate electricity globally, oil accounts for 90% of energy consumed in transportation, according to the IEA.

Political Sensitivity to Rising Energy Prices in the U.S. and EU. The political sensitivity to oil price hikes, especially in the U.S., was a significant constraint on the political response to the Russian invasion. 

The politics of “prices at the pump” help to explain the relatively tepid U.S./EU actions on oil. In contrast to natural gas, a larger share of oil products are consumed by individuals and families (especially in the U.S.), and sudden, large price changes are often politically charged. [23] After the Russian invasion, President Joe Biden proposed a three-month federal gasoline tax holiday, and several states implemented temporary state tax holidays.[24] A number of European countries similarly implemented VAT tax relief for gasoline in response to soaring prices.[25] As a result of this widespread political sensitivity, the G7’s signature policy for pressuring Russian oil export revenues — price caps on the country’s sales of crude oil and refined products — was set at levels calibrated not to disturb the status quo.[26]

In power and industrial applications, natural gas prices are an input to industrial and electrical output but are not obvious to the end consumer. However in those areas where natural gas does affect EU individual consumers directly — about one-third of EU residential consumption is for heating and cooking — prices have been protected and have generally not risen to the extent wholesale prices have. Pricing of natural gas to consumers also lags based on long-term contracts, providing a cushion for the governments and more time to respond. In addition, electricity prices — which increased as a result of the high prices of gas and its substitutes, like coal — have been subsidized by many EU governments.

Complexity of “Oil.” Whereas natural gas is relatively homogenous with minor differences among global markets (driven by the amount of non-methane hydrocarbons remaining in the natural gas stream), “oil” is a very diverse array of products:

• Grades of crude oil vary dramatically in their specific gravity (known as light, medium, and heavy crudes), sulfur content (known as sweet or sour), and other variables. This impacts the ability of refiners to switch between different sources of supply.
• Additionally, non-crude oil liquids like ethane represent a large and growing share of global “oil” production.
• Once processed in a refinery, the range of products is equally complex. Many of these products are traded and priced separately, and transported by both pipelines and ships — there are, for example, “clean” and “dirty” tankers for refined products and crude oil, respectively.

A significant complication for the West’s efforts to develop sanctions on Russian oil was how to develop price caps for the wide range of refined products. The G7 eventually went with a simplified two-tier system: “high” and “low” value products, rather than trying to cap each refined product separately.

As well as supplying its domestic needs, Russia’s refinery operations generate surplus refined product. That surplus is an integral part of the global marketplace, and any effort by Russia to weaponize refined product exports would be complicated by the need to supply its home market.

Finally, a long history of oil-related sanctions on countries including Iran and Venezuela has led to the development of sanction-busting networks — capabilities that Iranian officials have reportedly shared with Russia.[27]

Lessons for Policymakers

Attempts to use oil and natural gas for geopolitical leverage — before and after Russia’s invasion of Ukraine — demonstrate the importance of energy across economic and political spheres. Because of the differences between the two energy sources, the perceptions of possible leverage varied with each — and there are significant gaps between those perceptions and reality. 

One clear lesson is that possibilities for leverage vary according to the conditions. Both Russia and its opponents learned this when they tried to employ oil and gas trade flows as weapons. Price signals, inventories, and diversity of supply and suppliers as well as fuels, all helped to alter perceived leverage. Well-diversified trade in energy — and other critical products — paired with related infrastructure and government policy can help secure supply when unexpected factors complicate markets. 

Russia clearly anticipated that it could use Europe’s dependence on its natural gas exports as leverage to weaken European resolve in responding to the Ukraine invasion. This perception was based on natural gas being seen as a regional market with limited infrastructure in Europe for bringing in alternative gas supplies. A combination of sharp price increases, quick policy action, ability to pay very high prices, and good luck with the weather has allowed Europe to manage the dramatic reduction of Russian natural gas availability — so far.

• The dramatic spike in natural gas prices for industrial users and power generators encouraged conservation and fuel switching, as well as increased supply availability from non-Russian sources.
• Policy action — including RePowerEU at the EU level as well as national policy measures — has helped to speed the development of new LNG import terminals, extended until April 2023 the availability of German nuclear energy, and incentivized aggressive conservation measures.
• The warm winter of 2022-2023 greatly reduced seasonal demand and kept European natural gas storage at record-high levels.

Even so, there is little room for comfort or celebration.

• Most importantly, natural gas storage is limited and cannot substitute for all imports. This means Europe will have to continue to call on non-Russian supplies; however, these are limited due to production and infrastructure concerns.
• Only negligible volumes of new LNG capacity will come online in 2023, while China is likely to use more LNG this year than it did in 2022 under its Zero COVID policy — meaning it will have less LNG available to re-sell.
• In addition, weather will be a significant factor: Hot summers and/or cold winters either in Europe or Asia would strain supplies.

At best, in the short term, Europe will experience high levels of uncertainty, and at worst, large price hikes, forced fuel switching, and emergency energy saving measures will become the norm until more LNG supply comes online from the U.S. and Qatar around 2025-2026 and the ongoing rapid growth of renewable energy reduces gas demand in power generation.

At the same time, Russia will experience increasingly greater stress from the impacts of its cuts in natural gas flows to Europe. These piped volumes now have nowhere else to go due to the lack of alternative export infrastructure: No consumer can immediately substitute for Europe, which means lower revenues going forward and the prospect of shutting down production.

In contrast to natural gas, the Western allies sought to use the Russian government’s dependence on oil revenues as a means to undercut the financing of the war effort. To manage its own oil vulnerabilities, the West sought to tap its long-standing capabilities — unique for oil — to manage through the crisis, most notably through the large-scale release of strategic oil stockpiles.

But as with the developments that constrained Russia’s ability to use natural gas for leverage against Europe, the Western effort to apply oil leverage against Russia was complicated by events, some anticipated and others unforeseen:

• Most notably, the intense political vulnerability to spiking prices at the pump and Russia’s large role in global trade of crude oil and refined products took an outright ban on Russian oil sales (like the JCPOA sanctions against Iran) off the table and resulted in a set of price caps that have been — by design — of limited impact.
• Additionally, OPEC states refused to tap spare production capacity in response to requests from the Western allies.  

Over time, adjustments by Russia and the West are likely to affect their perceptions of and the reality of vulnerability to the potential use of energy as a weapon. As conditions change, so too will perceptions of vulnerability, and new realities will need to be considered.

• Russian natural gas flows are likely to become diversified away from Europe, most notably toward China, as new pipelines and LNG capacity are developed.
• European dependence on natural gas will be reduced as climate policies drive a transition to lower-carbon fuels, and new LNG capacity will diversify sources of remaining natural gas requirements.
• Globally, growth of the LNG trade will foster a more global marketplace, limiting regional leverage.
• For oil, rapid growth of electric vehicles will reduce dependence on oil as well as the intense focus of consumers and policymakers on prices at the pump.
• Lastly, U.S./EU sanctions on imports of equipment, spare parts, investment, and manpower (some of which were implemented after Russia’s invasion and annexation of Crimea in 2014) may crimp Russia’s ability to sustain its oil and gas production over the medium and long term. 

In the near term, however, the critical importance of oil and natural gas in the energy mix means that leverage will remain a geopolitical reality.

Endnotes

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[1] For more discussion of vulnerability in the context of energy security, see Mark Finley, Report: “Energy Security and the Energy Transition: A Classic Framework for a New Challenge,” Rice University’s Baker Institute for Public Policy, Houston, Texas, November 25, 2019, https://www.bakerinstitute.org/research/energy-security-and-energy-transition-classic-framework-new-challenge.

[2] The theory is based on the seminal work of Robert O. Keohane and Joseph S. Nye, “Power and interdependence,” Survival 15(4) (July 1973): 158–165, https://doi.org/10.1080/00396337308441409.

[3] Source: BP Statistical Review of World Energy 2022 edition, https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html.

[4] For more discussion of the regional and global dimensions of the crisis for oil, see Mark Finley and Jim Krane, research paper: “Reroute, Reduce, or Replace? How the Oil Market Might Cope With a Loss of Russian Exports After the Invasion of Ukraine,” Rice University’s Baker Institute for Public Policy, Houston, TX, March 10, 2022, https://www.bakerinstitute.org/research/how-oil-market-might-cope-loss-russian-exports. For consideration of Europe’s dependence on Russian gas see Gabriel Collins, Kenneth B. Medlock III, Anna Mikulska, and Steven R. Miles, research paper: “Strategic Response Options if Russia Cuts Gas Supplies to Europe,” Rice University’s Baker Institute for Public Policy, Houston, TX, February 11, 2022, https://www.bakerinstitute.org/research/strategic-response-options-if-russia-cuts-gas-supplies-europe.

[5] See comment on availability of gas supply in Anna Mikulska’s Testimony to the Senate Committee on Energy and Natural Resources for the “Hearing to Examine the Impact of the Russian Federation’s War in Ukraine on European and Global Energy Security One Year after the Invasion,” Washington, February 16, 2023, https://www.energy.senate.gov/services/files/361B439A-B3DC-4A28-9D32-419D69FAE0C3.

[6] See gas pipelines from Russia to the EU here: https://ednh.news/nord-stream-1-russian-pipeline-leaving-europe-on-edge/.

[7] See EURACTIV.com with Reuters, “Gazprom’s export revenue may fall by 50% in 2023,” February 15, 2023, https://www.euractiv.com/section/global-europe/news/gazproms-export-revenue-may-fall-by-50-in-2023/.

[8] Novatek is often referred to as “independent gas producer.” However, a “non-state” description is more fitting, as in an authoritarian regime hardly any company, especially within such a critical industry, can be considered independent.

[9] https://www.norskpetroleum.no/en/production-and-exports/exports-of-oil-and-gas/#oil-and-gas-exports.

[10] U.S. Energy Information Agency, “Europe was the main destination for U.S. LNG exports in 2022,” March 23, 2023, https://www.eia.gov/todayinenergy/detail.php?id=55920.

[11] See U.S. Energy Information Agency, “Spot Prices,” US EIA, annual, https://www.eia.gov/dnav/pet/pet_pri_spt_s1_a.htm. 

[12] For additional discussion of the political sensitivity of gasoline prices (especially in the U.S.), see Mark Finley and Anna Mikulska, research paper: “Energy Transition, Energy Security, and Affordable Fuel: How the Energy Crisis Can Help Policymakers ‘Thread the Needle’,” Rice University’s Baker Institute for Public Policy, Houston, TX, August 5, 2022, https://doi.org/10.25613/2E9H-JX43.

[13] See European Commission press releases “G7 agrees oil price cap: reducing Russia's revenues, while keeping global energy markets stable”, December 3, 2022, https://ec.europa.eu/commission/presscorner/detail/en/IP_22_7468, and “Ukraine: EU and G7 partners agree price cap on Russian petroleum products”, February 4, 2023, https://ec.europa.eu/commission/presscorner/detail/en/ip_23_602.

[14] See Anatoly Kurmanaev and Stanley Reed, “How Russia Is Surviving the Tightening Grip on Its Oil Revenue”, New York Times, February 7, 2023, https://www.nytimes.com/2023/02/07/business/russia-oil-embargo.html.  

[15] See Darya Korsunskaya and Alexander Marrow, “Russia’s March energy income drops 43% y/y, quarterly tax supports monthly revenue”, Reuters, April 5, 2023, https://www.reuters.com/markets/commodities/russias-march-energy-income-drops-43-yy-quarterly-tax-supports-monthly-revenue-2023-04-05/.

[16] BP data shows that in 2021, roughly one-quarter of global natural gas was traded internationally, compared with roughly 70% of global oil. Moreover, a much larger share of natural gas trade takes place via pipeline (vs LNG tankers) — roughly half according to BP. In contrast, the U.S. Energy Department’s Energy Information Administration estimated in 2017 that roughly 61% of global oil (crude and products) supply and demand was traded via maritime routes, which suggests that trade via tankers accounts for well over 80% of international oil trade. See BP Statistical Review of World Energy 2022 edition, https://www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html and U.S. Energy Information Agency, “World Oil Transit Chokepoints,” last updated July 25, 2017, https://bit.ly/46ffgzg. 

[17] Importantly, Russia rarely uses direct actions when using energy as tool of influence. Instead, reductions in supply are usually characterized as related to “technical difficulties” or as a fault of the contracting party, e.g., nonpayment of debts or — as in 2022 with respect to Poland and Bulgaria — as a result of result of refusal to pay for Russian gas in rubles: see Randall Newnham,  “Oil, Carrots, and Sticks: Russia’s Energy Resources as a Foreign Policy Tool,” Journal of Eurasian Studies 2(2): 134–143, https://doi.org/10.1016/j.euras.2011.03.004.

[18] Revenues from natural gas historically have been much smaller than those from oil export — per some reports gas constitutes about 20% of Russia’s total energy revenues. Energy revenues have constituted usually about 40-50% of the entire Russian budget. See, for example, Lauren Goodrich and Marc Lanthemann, “The Past, Present and Future of Russian Energy Strategy,” Rane Worldview, February 12, 2013, https://worldview.stratfor.com/article/past-present-and-future-russian-energy-strategy.

[19] For more information on UAE spare capacity see Jim Krane, Kristian Coates Ulrichsen and Mark Finley, research paper: “Should Abu Dhabi Quit OPEC? Reconsidering the UAE’s Membership,” Rice University’s Baker Institute for Public Policy, Houston, TX, June 1, 2023, https://www.bakerinstitute.org/research/should-abu-dhabi-quit-opec-reconsidering-uaes-membership.

[20] For more information see Kristian Coates Ulrichsen, Mark Finley and Jim Krane, research paper: “The OPEC+ Phenomenon of Saudi-Russian Cooperation and Implications for U.S.-Saudi Relations,” Rice University’s Baker Institute for Public Policy, Houston, TX, October 18, 2022, https://doi.org/10.25613/0B0F-J592.

[21] For discussion of the evolution of U.S. shale investment in the context of U.S.-Saudi relations, see Ulrichsen, Finley and Krane, “The OPEC+ Phenomenon.”

[22] The exception here was Poland, where natural gas suppliers are legally required to store at least 30 days of gas supply at any given time. This led to Poland’s storage levels in 2022 being much higher than in other European countries.

[23] See Finley and Mikulska, “Energy Transition, Energy Security, and Affordable Fuel.”

[24] See Rocky Mengle, “Is There a Gas Tax Holiday in Your State?” Kiplinger, December 9, 2022, https://www.kiplinger.com/taxes/604395/gas-tax-holiday.

[25] See Gavin Jones, “Climate goals take second place as EU states cut petrol prices,” Reuters, March 22, 2022, https://www.reuters.com/business/energy/climate-goals-take-second-place-eu-states-cut-petrol-prices-2022-03-22/.

[26] See for example, “Ukraine war: G7 and allies approve cap on price of Russian oil,” BBC, December 2, 2022, https://www.bbc.com/news/world-europe-63840412.

[27] See Matthew Karnitschnig, “Iran teaches Russia its tricks on beating oil sanctions,” Politico, November 9, 2022, https://www.politico.eu/article/iran-russia-cooperation-dodging-oil-sanctions/.

 

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