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The Role of Energy Markets in the War in Ukraine

The Issue:
Even though the West could cause great harm to Russia with sanctions on Russian energy exports, so far the United States and Europe have been…



This article was originally published by Econofact

The Issue:

Even though the West could cause great harm to Russia with sanctions on Russian energy exports, so far the United States and Europe have been reluctant to impose the harshest controls on energy. Despite the relatively few direct sanctions on Russian energy products however, the markets for oil and gas have been roiled since the Russian invasion of Ukraine, contributing to rising prices and inflation around the world. As the West finds ways to move away from Russian energy supplies and Russia becomes more isolated from the world economy there will be massive long-term effects for Russia’s energy production.

The Facts:

  • Revenues from oil and natural gas made up 45% of Russia’s federal budget in 2021. Energy exports accounted for roughly two-thirds of the country’s export earnings prior to the pandemic, with oil being Russia’s most important export by far, accounting for around half of export earnings (see chart).
  • Russia is the second most important exporter in world energy markets and Europe is especially dependent upon energy exports from Russia. 
  • Russia is already exporting less oil — about half a million barrels per day in April or possibly as much as three million barrels per day — thanks to sanctions that have made it harder to clear payments, charter ships and obtain insurance. In a tight 100 million barrel per day oil market even a relatively small decrease in supply can have big effects on prices.
  • As one of the lower cost oil producers in the world, Russia tends to profit greatly when there’s a big rise in oil prices. However, some of the windfall gains from higher oil prices has been whittled away from Russia by discounts to big buyers like China and India; extra fees that are being paid to insurance companies; higher fees to charterers; and so on.
  • While the Russian supplies of natural gas to Europe have not faltered thus far, Europeans are moving to reduce their near-term dependence on Russian gas exports and to reduce their dependence on natural gas altogether in the longer term. My estimate is that this year alone we could see perhaps a shift of about 20% of European gas to non-Russian sources, mostly through purchases of liquefied natural gas (LNG). In the longer term, the Russian invasion of Ukraine has provided Europe with additional incentives to accelerate efforts to transition towards clean and efficient alternatives to natural gas.
  • Sanctions that limit Russian access to western technology limit its potential for future productive capacity in energy exports, especially with respect to gas.


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