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Global energy markets apocalypse in 2022

December 24, 2022 at 2:31 pm

Signs which read “out of order” is pictured on gasoline pumps at a TotalEnergies gas station in Versailles near Paris, France. [Mustafa Yalcin – Anadolu Agency]

The year 2022 saw the energy topic return intensely to the attention of media, political leaders and public opinion after Russia’s invasion of Ukraine in February. Russia’s war has had huge impacts on the global energy system, disrupting supply and demand patterns and fracturing long‐standing trading relationships.

Each energy crisis has echoes of the past, and the ongoing crisis in markets today are drawing comparisons with the most severe energy disruptions in modern energy history, most notably the oil embargo of the 1970s during the October 1973 Arab-Israeli War. In response to the Arab oil producers’ embargo, then US President Richard Nixon ordered a cut on oil sales.

Similarly, last October, OPEC+ which includes Russia and Saudi Arabia announced the biggest cut after the pandemic. It was in effect a hidden embargo against the US just before mid-term elections. But, globally, this cut will hurt low and middle-income countries already struggling with elevated energy prices the most. Additionally, OPEC+ went on to cut production as global oil prices soared in the first half of the year, leading to fears that a global recession will depress demand.

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In terms of gas, the gas crisis triggered by Russia’s invasion of Ukraine has caused a series of market adjustments. President Joe Biden announced that natural gas will not flow through Russia’s Nord Stream 2 pipeline to Germany in response to Moscow’s invasion of Ukraine. According to the International Energy Agency, the Nord Stream 2 Pipeline could deliver 55 billion cubic meters of gas per year. That’s more than 50 per cent of Germany’s annual consumption and could be worth as much as $15 billion to Gazprom, the Russian state owned company that controls the pipeline, based on its average export price in 2021.

Since the war began, Western sanctions on Russian oil and gas have blocked the doors of access to Russia. Russia’s production has, however, held up better than predicted, with supply being diverted to China and India. Consequently, the United States and Europe are now working on ways to implement a G7 agreement to cap the price of Russian crude exports to third countries.

After all these chaotic energy rifts, the most important question should be asked: Is the crisis a boost or a setback for energy transitions?

Undoubtedly, skyrocketing energy prices and a heightened focus on energy security/independence due to the war in Ukraine will not slow the long-term transition. Europe is likely to accelerate its energy transition during and after the war in Ukraine. There will be a rapid phase out of imported Russian fossil fuel and rising to the top of the agenda will be energy security, which hinges on renewables-dominated energy.

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In terms of clean energy economies, Putin’s war has presented a good opportunity for the EU to engage in an accelerated fossil detox process. According to Petteri Taalas, the secretary-general of the World Meteorological Organization, from [a] climate perspective, the war in Ukraine may be seen as a blessing. “We are going to invest much more in renewable energy, energy-saving solutions,” he said.

In Europe, for example, heat pumps sales have incrased since the war began. Germany’s National Energy Transition Project Agora Energiwende reported in August that 148,000 Germans applied for a fresh round of government funding for heat pumps; there were 150,000 applications for all of 2021.

Moreover, solar panel installations are speeding-up. According to data shared by Bloomberg New Energy Finance (BNEF) in July 2022, the imports of solar panels from China — where more than three-quarters of Europe’s panels are manufactured — hit $2.5 billion compared with about $1 billion a month before the war.

To conclude, the world is in the midst of its first truly global energy crisis. In this regard, 2023 is expected to confirm that some of the lessons of past months have been finally learnt and some of the progress made will be consolidated and increased further. Yes – even in one of darkest years of the modern age, there are reasons for optimism. The second article of this “energy trilogy 2022” will be on Turkey’s inflation and fossil fuel dependency in 2022.

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The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.