Russia’s Ukraine Invasion Raises Questions About Energy Policy

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Russia produces about 10 million barrels of oil a day. In recent years, it has supplied Europe with nearly 40 percent of its natural gas imports and more than a quarter of the oil it buys from abroad. Dependence on the country’s energy supplies, and fears of how a disruption to its exports may increase prices, have made it difficult for other governments to impose sanctions on one of its biggest industries.

As Russia’s attack on Ukraine, ordered by President Vladimir V. Putin, highlights holes in the West’s energy security, some have questioned the push by governments and investors in recent years to move money away from fossil fuels and toward renewable energy sources.

Daniel Yergin has written several books on the connection between geopolitics and oil. His first, “The Prize: The Epic Quest for Oil, Money & Power,” won a Pulitzer Prize. His most recent, “The New Map: Energy, Climate, and the Clash of Nations,” captures the complicated interrelation of climate policy, national security and energy.

Mr. Yergin, who is also the vice chairman of the financial data company IHS Markit, spoke to DealBook this week. The interview has been condensed and edited for clarity.

How do you connect Putin’s decision to invade Ukraine with what’s happening in energy markets?

This was a very advantageous time for Putin to move. The oil market always goes through cycles, but it’s just gone through the most violent cycle that I’ve ever studied — from negative prices less than two years ago to an incredibly tight market. Whether Putin calculated that or not, he chose a time when oil markets are really tight, gas markets are really tight, coal markets are really tight, and he’s a big exporter of all three. So he’s a beneficiary of it. That gives him leverage. So whatever this terrible invasion is costing Russia, he’s making a lot of money from a higher oil price.

It’s noticeable that oil and gas were not directly sanctioned [by European countries]. And that’s because, you know, if they were to do that, you would really be hitting Europe. I mean, it would partly immobilize Europe. That’s why this is such a difficult situation.

How did we get here?

I think people just forgot about energy security. As the U.S. went from importing 60 percent of our oil to becoming an exporter, we then didn’t think about it anymore. What we’ve had recently is somewhat shortsighted policies about investment. And the term I’ve been using is “pre-emptive underinvestment” in developing new resources. Oil demand is still increasing and is likely to increase at least for the rest of this decade and perhaps an early next decade.

How much of that is a function of the move toward greener energy?

There is a paper written by an economist, Jean Pisani-Ferry, from a macroeconomic point of view, saying if you try and move too fast it’s going to be quite disruptive. And he wrote that in August, and it sort of seemed like an interesting paper. And then this energy crisis in Europe began before Putin put the brakes on deliveries of gas last October.

It was also just within the last month that Germany closed down its last two nuclear power plants. And so that meant importing more gas.

Do you think this is a policy issue, or are investors taking the lead in moving away from more oil supply?

It was a combination of policies, but certainly also the power of the market investors. First of all, the returns for several years were quite poor. We’ve had two oil price collapses since 2014.

What about the role of government? Both the Federal Reserve and the S.E.C. are pushing companies for more disclosures about carbon emissions.

We’ll see what comes out of the S.E.C. and the Fed turning financial regulators into environmental regulators, too. I think oil investment is going to be harder. I’ve heard some oil company leaders say: “Maybe we have to become a private company. We can’t be a public company and still be in this business.” I don’t think any of them are doing that, but they’re feeling those pressures. So it’s a mixture of investors and government.

What can the U.S. do to lessen Western dependence on Russian oil?

The U.S. has clearly indicated that it’s going to look to Saudi Arabia to increase production. There isn’t a lot of spare capacity in the world for extra oil production to come from right now. Saudi Arabia and the United Arab Emirates have the bulk of it. There undoubtedly is going to be some pretty intense diplomacy now between Washington and Saudi Arabia.

So what’s your expectation in terms of price over the next six months?

The first big study I did when we started our company is called “The Future of Oil Prices: The Perils of Prophecy.” Having said that, I think we’re in a tight market for some time. Prices would’ve been high anyway, and now they will be higher because of disruption. The question is whether those higher prices will in turn discourage consumption.

The things that could change: First, a U.S.-Iranian deal, which would bring back over a million barrels of oil into the market. Second, U.S. production this year will probably increase by about a million barrels a day. Those are the two big things on the supply side. On the demand side, the cure for high prices is high prices. What will it do to demand? This is another step up in inflation as these costs flow through to consumers and to companies.

What can be learned about how to approach energy policy and investment in renewable energy from this?

Wind and solar don’t directly replace oil, unless you have a lot of electric cars. It does encourage trying to accelerate the energy transition, although you may not have as much money to do it. On the other hand, I think it also means you have to think about near- and middle-term energy security, as well as your climate goals. And if you don’t pay attention to energy security, you’re going to have more disruptions and more turbulence, which will make it harder to achieve your climate goals.

What do you think? How will Russia’s invasion of Ukraine impact energy policy? Let us know:


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